5. Shares in Rugby plc, a non-dividend-paying company, are trading at £7.50. A one-year Europeancall option on Rugby plc stock with strike price £8.00 has a risk-neutral probability of exerciseequal to 40%.Explain what this implies about the risk-neutral probability of exercise for a one-year Europeanput option on Rugby plc with strike price £8.00. *

The call and put option are derivative products that gives the opportunity of buying and selling the…

5. Shares in Rugby plc, a non-dividend-paying company, are trading at £7.50. A one-year call option on Rugby plc stock with strike price £8.00 has a risk-neutral probability of exe equal to 40%. Explain what this implies about the risk-neutral probability of exercise for a one-year Eur put option on Rugby plc with strike price £8.00. *

5. Shares in Rugby plc, a non-dividend-paying company, are trading at £7.50. A one-year call option on Rugby plc stock with strike price £8.00 has a risk-neutral probability of exe equal to 40%. Explain what this implies about the risk-neutral probability of exercise for a one-year Eur put option on Rugby plc with strike price £8.00. *

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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The price of a stock, which pays no dividends, is $64 and the strike price of a one year European call option on the stock is $60. The risk-free rate is 3% (continuously compounded). What is the lower bound for the call option? A. $5.98 B. $5.77 C. $4.12 D. $2.17
The cost associated with maintaining rural highways follows a predictable pattern. There are usually no costs for the first 3 years, but thereafter maintenance is required for restriping, weed control, light replacement, shoulder repairs, etc. For one section of state highway S102, these costs are projected to be $6000 in year 3, $7000 in year 4, and amounts increasing by $1000 per year through the highway’s expected 30-year life. (a) Assuming it is replaced with a similar roadway, determine the perpetual equivalent annual cost (years 1 to ∞) at an interest rate of 8% per year. (b) Verify your factor-based answer on a spreadsheet in the most efficient way you know.
12. A non paying dividend stock is priced at 50. Call option delta is 0.5. Stock volatility is 0.29. By using BS model, the premium of 55-strike priced European call option in 6 months is
1. Three months ago an investment company bought for £8 a call option on a stock with an exercise price of £136. If the stock price at expiration of this option is £147. Select which of the following best describes the option value, the decision of the Investment Company and the return on investment thereon. A. Option value Decision Profit / (loss) % Exercise price – Stock price Exercise 37.5% B. Option value Decision Profit / (loss) % Stock price – Exercise price Don’t Exercise 2.2% C. Option value Decision Profit / (loss) % Exercise price – Stock price Exercise 2.2% D. Option value…
Sunshine Cruise does not pay a dividend and is currently trading at $36 per share with a volatility of 45% .The current risk free rate of interest is 4% .The price of a put option on Sunshine with a strike price of $35 that expires in 91 days is closes to:
Imagine TOP HAT Prefabs issued common shares at a market price of GBP 88 and paid dividends of GBP 6 in 2020. If dividends in 2021 are expected to grow by 5%, the market by 8%, and flotation costs are 20% of market price, what would the company’s cost of equity be? Current market price is GBP 99 and the gilt bond (UK government) gives a 1% rate. If TOPHAT Prefabs was planning to provide a constant growth rate of dividends, what would this growth rate be considering that the UK Gilt rate is 1,5%, the expected rate of return of the market is 3% and the CAPM is 12%? The company needs to purchase raw materials and decides to contract 2 loans for a period of 5 years, as follows: a GBP 80,000 with a 3% semi-annual interest rate and a GBP 150,000 with a 2% quarterly interest rate. What is the effective interest rate for TOPHAT Prefabs? The company decides to renew its manufacturing equipment and sell 2 assembling machines at a price of GBP 15,000 and GBP 25,000 respectively. The…
Kk.192.
The risk-free rate is 2.5%. And the AAP Corporation currently trades at $200. Ignore transaction costs, and assume that the stock pays no dividends. What is the spread between a put and a corresponding call for AAP’s options expiring in 2 years with a strike price of $220?
A share is currently priced at £50. After one time period the share price will either increase to £70 or decrease to £40. Assume the interest rate is 4% per time period. Find the no-arbitrage price of a European derivative on the share which has payoff £90 if the share price goes up and £110 if the share price goes down. State your answer to the nearest pence. Do not enter the pound sign.
Awesome Company's stock is currently trading at 50 per share and the risk free rate is currently 6% per year. The price of a put option on Awesome stock with a strike price of 30 and 6 months to maturity is currently 1. Determine the price of a call option with the same strike price and maturity as the put option. No dividends will be paid during the remaining lifetime of the option. A. 20.96 B. 21.86 C. 22.70 D. 51.00
4. Shares of ABC Ltd are currently traded at Rs .1770. A call option with a strike price of 1750 and expiring in 90 days is traded at Rs.60 while a put with same strike price and maturity is traded at Rs .25. Show the payoff profile of a long straddle position using these options assuming that the share price on expiry date falls in the range of 1550 to 1950 at intervals of Rs.50. Also show the payoff diagram.
Problem 1. Assume that the interest rate is 5%, continuously compounded annually, and consider call and put options of both American and European style expiring in 6 months on non-dividend paying stock. For each of the following scenarios, check if you can find an arbitrage opportunity and, if you can, describe it: (i) The strike price of a European put option is $3 and the option is traded at $4. (ii) The shares are traded at $3 and the American call option is traded at $3.20.

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