9. You are looking to hedge your risk with respect to some shares of Apple stock that you own. To do so, you examine some put options. • As the price of Apple stock rises, what will happen to the value to the put options you are examining? Why? • One put option you are interested in expires in July and another expires in August. Which will have a higher price? Why? • What will happen to the price of the put options if, all of a sudden, the volatility of Apple's share price declined?

9. You are looking to hedge your risk with respect to some shares of Apple stock that you own. To do so, you examine some put options. • As the price of Apple stock rises, what will happen to the value to the put options you are examining? Why? • One put option you are interested in expires in July and another expires in August. Which will have a higher price? Why? • What will happen to the price of the put options if, all of a sudden, the volatility of Apple's share price declined?

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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This example is part of "Hedged Portfolios" to minimize risk. Assume you have $7000 to invest; A stock is trading at $100.00. A call option that expires in one year with a strike price of $100.00 is trading at $8.00. How much is your portfolio's 1-year return if you invest in "Only Options" and the stock price after one year is $54.00? Enter your answer in the following format: + or - 0.1234 Hint: The Answer is between -0.89 and -1.08
You buy a share of stock, write a 1-year call option with X = $10, and buy a 1-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. (a) What is the payoff of your portfolio? (b) What must be the risk-free interest rate? The stock pays no dividends.
Yinzhou is an investment adviser of CBMC Fresno Inc., and one of his client intends to invest in a stock that plots below the security market line (SML). What would be the appropriate recommendation? O Invest; The expected return is high relative to the risk. O Don't invest; The risk is high relative to the expected return. O Invest; All stocks revert to the SML over time. O Don't invest; All stocks below the SML are low-growth stocks.
An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely? Multiple Choice the 20% stock is a better investment. the 14% stock is overpriced. Both stocks will have approximately the same return. Both stocks are priced correctly given their perceived risk.
You have six investment options based on the following three given stocks (X, Y, and Z): State of Economy Boom Normal Bust Probability Rx 0.2 0.5 0.3 Option 1 (X only) Option 2 (Y only) Option 3 (Z only) Option 4 (X and Y) Which one of the following investment options has the lowest risk? (Try to answer the question without any calculations.) Option 5 (X and Z) Ry Option 6 (Y and Z) Rz 2% 20% 30% 9% 12% 17% 27% -2% -5%
Consider a call option on stock XYZ with six months remaining to maturity. In a crisis, the volatility of the share increases and the share price drops. We should expect that: Multiple Choice О the value of the call option increases the value of the call option decreases it is uncertain if the value of the call option increases or decreases
Which of these statements is true? Multiple Choice Many people purchase stocks as they find comfort in the certainty for this safe form of investing. When people purchase a stock, they do not know what their return is going to be-either short term or in the long run. When people purchase a stock, they know the short-term return, but not the long-term return. When people purchase a stock, they know exactly what their dollar and percent return are going to be.
Based on Torelli’s scenarios, what is the mean return of GMS stock? What is the standard deviation of the return of GMS stock? 2. After a cursory examination of the put option prices, Torelli suspects that a good strategy is to buy one put option A for each share of GMS stock purchased. What are the mean and standard deviation of return for this strategy?
You are trying to plan your investments for the next year. You have decided that the market will either be strong (a bull market), weak (a bear market) or normal. You think that stocks, bonds, and bills will earn the following returns in these scenarios: Scenario Bull market Normal market Bear market Probability 0.20 0.55 0.25 Stock Bond Return Return 0.25 0.10 -0.15 0.06 0.04 -0.02 Bill Return 0.03 0.03 0.03 You have also decided that you have a risk-aversion (A) of 4. (a) What is the expected return for each of the securities? (b) What is the volatility of each security return? (c) What is the covariance between stock and bond returns? (d) If you combine stocks and bills as an investment, what is your op- timal combination? What is your expected return? What is your portfolio's volatility? (e) If you combine bonds and bills, what is your optimal combination? What is your expected return? What is your portfolio's volatility? (f) If you combine stocks and bonds, what is your optimal…
You are analyzing a stock that has a beta of 1.19. The risk-free rate is 4.4% and you estimate the market risk premium to be 6.6%. If you expect the stock to have a return of 9.8% over the next year, should you buy it? Why or why not? The expected return according to the CAPM is%. (Round to two decimal places.) Should you buy the stock? (Select the best choice below.) O A. Yes, because the expected return based on the beta is equal to or less than the return on the stock. O B. No, because the expected return based on the beta is greater than the return on the stock.
A protective put is a strategy in which the losses are limited on the bearish side, and the profits are unlimited on the bullish side. Create an excel spreadsheet to keep track of your profit\loss at various stock prices Assume you have a portfolio of 100 shares and you were afraid that the price will go down, thus, you have purchased a June put option with exercise price X=125, Assume that the current stock price is 125.94.
At time t=0 Mr. Anderson sets up a riskless portfolio by taking a position in an option and in the underlying asset. Explain what Mr. Anderson needs to do at time t=1 to keep his portfolio risk neutral and why. A stock price is currently $100 and at the end of four months it will be ST . A derivative written on this stock pays off expST1/3 in four months. Given that u = 1.15, d = 0.87, and that the risk-free interest rate is 10% p.a. (continuously compounded), answer the following questions using a one-period binomial model (show all the details of your calculations and display the results with four decimal places): Calculate the value of ∆ Calculate the current value of the derivative.

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