2. (a) Let the following be observed for the stock price of ZPZ-Bank this day: P = £5.50 (The current stock price) X = £5.20 (The exercise price) r = 6 (The continuously compounded interest rate) t = 0.25 (the one-quarter of a year) = 0.25 (the continuously compounded variance of the stock return) = 0.5 (the standard deviation of the stock return) Using the above information and the following Black-Scholes option pricing formula: C = SN(d,)– Xe" N(d,) (i) determine the fair value of a three-month call option, (ii) determine the fair value of a three-month put option, (iii) Briefly explain how an options trader could take advantage of changes in the volatility of the underlying stock price.

2. (a) Let the following be observed for the stock price of ZPZ-Bank this day: P = £5.50 (The current stock price) X = £5.20 (The exercise price) r = 6 (The continuously compounded interest rate) t = 0.25 (the one-quarter of a year) = 0.25 (the continuously compounded variance of the stock return) = 0.5 (the standard deviation of the stock return) Using the above information and the following Black-Scholes option pricing formula: C = SN(d,)– Xe" N(d,) (i) determine the fair value of a three-month call option, (ii) determine the fair value of a three-month put option, (iii) Briefly explain how an options trader could take advantage of changes in the volatility of the underlying stock price.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Suppose your expectations regarding the stock price are as follows: State of the Market Boom Normal growth Recession Probability Ending Price 0.21 $ 140 0.30 110 0.49 80 Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) - E(r)]² to compute the mean and standard deviation of the HPR on S S HPR (including dividends) 50.5% 18.0 -12.5 stocks. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Mean Standard deviation Answer is complete but not entirely correct. 13.65 % 20.48 %
suppose the common stock of United Industries has a beta of 1.19 and an expected return of 11.8 percent. The risk-free rate of return is 3.5 percent while the inflation rate is 2.6 percent. What is the expected market risk premium? round to 2 decimal places,
Suppose the risk-free return is 3.7% and the market portfolio has an expected return of 8.8% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.73. What is its expected return (Round to 2 decimal places)
Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall. Given this forecast, which of the following statements is CORRECT? a. The required return on all stocks will remain unchanged. b. The required return will fall for all stocks, but it will fall more for stocks with higher betas. c. The required return for all stocks will fall by the same amount. d. The required return will fall for all stocks, but it will fall less for stocks with higher betas. e. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
Refer to the given (annual data to compute the stock's beta if the market standard deviation is 0.22 and the market and the stock share +0.5 correlation. The current market price of the stock is $50 per share. Probability End-of-period prices .15 35 .10 42 Ć .30 50 .20 55 .25 60
The returns of a stock follow the normal distribution, with average return of 13.2% and standard deviation of 23.7%. What is the probability that in any given year, the stock's return will be between -34.2% and +36.9%? Assume the following: the one standard deviation probability range is 0.68; the two standard deviation probability range is 0.95; and the three standard deviation probability range is 0.99. 0.685 O 0.955 O 0.750 0.815 O 0.950
Suppose that stock market returns are normally distributed with a mean of 7% and a standard deviation of 20%. There should be about a 2.5% chance of getting a return greater than %. Write your answer as a whole number: eg, 28% = 28.
Suppose the common stock of United Industries has a beta of 0.83 and an expected return of 8.7 percent. The risk-free rate of return is 3.4 percent while the inflation rate is 2.8 percent. What is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
The last four years of returns for a stock are shown here: a. What is the average annual return? b. What is the variance of the stock's returns? c. What is the standard deviation of the stock's returns? Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format. a. What is the average annual return? The average return is ☐ %. (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year Return 1 -4.12% 2 +27.56% 3 + 12.24% +4.35% Print Done - X
a. Compute the expected rate of return for Intel common stock, which has a 1.5 beta. The risk-free rate is 4 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 14 percent. b. Why is the rate you computed the expected rate?
A stock has an expected return of 10%, its beta is 0.9, and the risk-free rate is 5%. Calculate the expected return on the market. (Enter percentages as decimals and round to 4 decimals)
(Expected rate of return using CAPM) a. Compute the expected rate of return for Intel common stock, which has a 1.5 beta. The risk-free rate is 4 percent and the market portfolio (composed of New York Stock Exchange stocks) has an expected return of 13 percent. b. Why is the rate you computed the expected rate? a. The expected rate of return for Intel common stock is%. (Round to one decimal place.)

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