24. What will be the lower bound for the price of a three-month European put option on a non- dividend-paying stock if the current stock price is USD 22, the strike price is USD 26, and the annual risk-free rate is 10%? Choose the best answer. (a) $3.36 (b) $4.00 (c) $2.69 (d) $4.83 25. The current price of stock ABC is $98 and the put option with a strike at $100 is trading at $6.34. Expiration is in one year. The corresponding call is priced at $8.22. Which of the following trading strategies will result in arbitrage profits? Assume that the annual risk-free rate is 5%, and that there is a risk-free bond paying the risk-free rate. At the same time, assume that there are no transaction costs. (a) Long position in both the call option and the risk-free bond, and short position in the stock and the put option (b) Short position in both the call option and the stock, and long position in the put option and risk-free bond (c) Short position in both the call option and the put option, and long position in the stock and risk-free bond (d) Long position in both the call option and risk-free bond, while longing the stock and the put option 26. To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses the Black-Scholes model to value all option exposures. The current price of the shares is $90. The annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months. If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised?
24. What will be the lower bound for the price of a three-month European put option on a non- dividend-paying stock if the current stock price is USD 22, the strike price is USD 26, and the annual risk-free rate is 10%? Choose the best answer. (a) $3.36 (b) $4.00 (c) $2.69 (d) $4.83 25. The current price of stock ABC is $98 and the put option with a strike at $100 is trading at $6.34. Expiration is in one year. The corresponding call is priced at $8.22. Which of the following trading strategies will result in arbitrage profits? Assume that the annual risk-free rate is 5%, and that there is a risk-free bond paying the risk-free rate. At the same time, assume that there are no transaction costs. (a) Long position in both the call option and the risk-free bond, and short position in the stock and the put option (b) Short position in both the call option and the stock, and long position in the put option and risk-free bond (c) Short position in both the call option and the put option, and long position in the stock and risk-free bond (d) Long position in both the call option and risk-free bond, while longing the stock and the put option 26. To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses the Black-Scholes model to value all option exposures. The current price of the shares is $90. The annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months. If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised?
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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Transcribed Image Text:24. What will be the lower bound for the price of a three-month European put option on a non-
dividend-paying stock if the current stock price is USD 22, the strike price is USD 26, and the
annual risk-free rate is 10%? Choose the best answer.
(a) $3.36
(b) $4.00
(c) $2.69
(d) $4.83
25. The current price of stock ABC is $98 and the put option with a strike at $100 is trading at $6.34.
Expiration is in one year. The corresponding call is priced at $8.22. Which of the following trading
strategies will result in arbitrage profits? Assume that the annual risk-free rate is 5%, and that
there is a risk-free bond paying the risk-free rate. At the same time, assume that there are no
transaction costs.
(a) Long position in both the call option and the risk-free bond, and short position in the stock
and the put option
(b) Short position in both the call option and the stock, and long position in the put option and
risk-free bond
(c) Short position in both the call option and the put option, and long position in the stock and
risk-free bond
(d) Long position in both the call option and risk-free bond, while longing the stock and the put
option
26. To create a delta-neutral portfolio, the SIT fund has sold 10,000 at-the-money (ATM) put options
on Epsilon stock with when the shares were trading at $100. The risk manager from SIT uses
the Black-Scholes model to value all option exposures. The current price of the shares is $90. The
annualized standard deviation of Epsilon stock returns is 40% and the option expires in six months.
If the risk-free rate is 2%, approximately, what is the likelihood that this option will be exercised?
(a) 0.6839
(b) 0.7975
(c) 0.3161
(d) 0.2025
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