26. The current stock price is $55, and its volatility is 40%. What is the price of a European put optionwith a strike price of $60 and time to maturity of 1 year. The risk-free interest rate is 7%Icontinuously compounded. Use the Black-Scholes-Merton model. Do this by hand and not thespreadsheet except for looking up N(d.) and N(d2) using the N(d₁) =normsdist(d1) formula..A. $9.27B. $9.68C. $10.11D. $10.89E$11.23

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Answered: 26. The current stock price is $55, and…

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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1.
You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9% Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]
The risk-free rate is 4%. The market risk-premium is 7%. The beta is 20. What is the expected rate of return on this stock? Answers: A.10% B12% C.18% D.20% E. 22
A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -
Suppose the current stock price of JuJube Inc is ¥100, the risk-free interest rate is 5%, the standard deviation is 25%, the time to maturity is 4 months, the strike price is ¥85, and the price of a call option is ¥25.20. Using the put-call parity relationship, the put option price is closest to A. ¥25.20 B. ¥16.40 C. ¥5.20 D. ¥8.80 E. None of the above
D3) Finance IS THIS TRUE OR FALSE? with proof if you can. "An investor is drawing the graph of implied volatility as a function of moneyness (wheremoneyness is measured as strike price divided by today’s stock price) for options on theexchange rate SEK/USD, using 3 months options with various strikes. According to theBlack-Scholes-Merton model the graph should, if markets are free of arbitrage, look like asmile with at-the-money options having low implied volatility and out-of the money andin-the-money options having high implied volatility" Is this statement true or false?
A stock price is currently $52. Its volatility is 35% p.a. . The risk-free interest rate is 8% p.a. with continuous compounding. What is the value of a 2-year European call option with a strike price of $55, using a 2-step binomial tree? Without doing any calculations, explain what would happen to the value of the option if the stock volatility decreases
f. Estimate Bartman's and Reynolds's betas by running regressions of their returns against the index's returns. Round your answers to four decimal places. Bartman's beta: fill in the blank 30 Reynolds's beta: fill in the blank 31 Are these betas consistent with your graph? These betas consistent with the scatter diagrams. g. Assume that the risk-free rate on long-term Treasury bonds is 4.5%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market's required return—it is too high. So use 9% as the expected return on the market. Use the SML equation to calculate the two companies' required returns. Round your answers to two decimal places. Bartman's required return: fill in the blank 33 % Reynolds's required return: fill in the blank 34 % h. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolio's beta and required return be? Round your answer for the portfolio's beta to four decimal places and…
The stock ABC has a spot price is So = 1100. The continuous interest rate is r = 0.05 and the continuous dividend yield is 6 = 0.02. Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake?
According to the CAPM, what is the expected return on a security given market risk premium of 13%, a stock beta of 1.77, and a risk free interest rate of 2%? Put the answer in decimal place.

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