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a) Is there an arbitrage?    Suppose an investment firm sells options.    (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12?    (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23?    Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm

a) Is there an arbitrage?    Suppose an investment firm sells options.    (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12?    (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23?    Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question

 

(a) Is there an arbitrage? 

 

Suppose an investment firm sells options. 

 

(b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? 

 

(c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? 

 

Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date

t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm

wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the

total profits of the firm.) 

 

(d) The underwriter suggests an IPO price of $40 per share. Will this IPO be successful,

i.e. will there be a positive demand for the shares?  

Consider an economy with two dates (t=0,1) and at t=1 there are three states. The following three stocks are traded: x;=(10,0,30) x2=(0,20,40) x3=(20,20,0) The t=0 prices of these stocks are given as follows (p!, p2, p3)=(12, 14, 8). (a) Is there an arbitrage? Suppose an investment firm sells options. (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm.) (d) The underwriter suggests an IPO price of $40 per share. Will this IPO be successful, i.e. will there be a positive demand for the shares?
Transcribed Image Text:Consider an economy with two dates (t=0,1) and at t=1 there are three states. The following three stocks are traded: x;=(10,0,30) x2=(0,20,40) x3=(20,20,0) The t=0 prices of these stocks are given as follows (p!, p2, p3)=(12, 14, 8). (a) Is there an arbitrage? Suppose an investment firm sells options. (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm.) (d) The underwriter suggests an IPO price of $40 per share. Will this IPO be successful, i.e. will there be a positive demand for the shares?
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