A stock has not been fluctuating much in price. Its average price is $20/share. You expect that the stock price behaves the same way in the next year. A one-year put option is selling for $5, which has an exercise price of $20. Suppose the risk-free rate is 0.05. To make use of your expectation in the future price movement, you establish a straddle strategy to maximize your profits. If the stock price actually ends up at $20 in a year, your profit is $ Give your answer to 2 decimal places.

A stock has not been fluctuating much in price. Its average price is $20/share. You expect that the stock price behaves the same way in the next year. A one-year put option is selling for $5, which has an exercise price of $20. Suppose the risk-free rate is 0.05. To make use of your expectation in the future price movement, you establish a straddle strategy to maximize your profits. If the stock price actually ends up at $20 in a year, your profit is $ Give your answer to 2 decimal places.

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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Similar questions

If the investor desires less risk than the market, he or she: A) buys stocks with alphas of zero. B) buys stocks with betas less than 1.0. C) makes sure the risk-free rate is higher than the expected market return. D) buys stocks only when the slope of the security market line is on a 45-degree angle.
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Bust: Market: -8% Aggressive Stock A: -10% Defensive Stock D: -6% Boom: Market: 27 Aggresive Stock A: 41 Defensive Stock D: 20 Required: a) Find the beta of each stock. b) If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. c) If the T - bill rate is 5%, what does the CAPM say about the fair expected rate of return on the two stocks? d) Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
An investor buys a stock if price rises 5% from the 250-day low and shorts a stock if price falls 5% from the 250-day high. What is this strategy called? Will it work if the market is efficient? Explain why
Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time toexpiration is 4 months, (4) annualized risk-free rate is 5%, and (5) varianceof stock return is 0.25.
Dotbomb’s stock has the following projected rates of return (outcomes): 10%, 15%,and 30%. The probabilities of their outcomes are 15%, 50%, and 35% respectively. a.What are the expected return and standard deviation of Dotbomb’s stock?b. What is the probability that Dotbomb stock will earn a return no more than 15%?c. What is the probability that Dotbomb stock will earn a return less than 15%
An analyst is studying the movement of the stock ABC. His research and came up with a different rates of return for ABC, 25% for strong and 10% for weak economic scenarios. Based on the latest economic outlook, the probability of having a strong, normal, and weak economy, are 30%, 50%, and 20%, respectively. The total expected return of ABC stock is 17% considering the various probabilities. Determine the rate of return of ABC if the economy turns normal.
Is there an arbitrage opportunity in this market? Explain.
A stock analyst at PJ Brokers estimates that the beta of stock ZLX is close to two (2.0). Therefore, ZLX will have an expected return that is: A) about equal to the risk-free rate B) about equal to the market expected return C) expected to exceed the market expected return
Black-Scholes Model Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $32, (2) strike price is $37, (3) time to expiration is 3 months, (4) annualized risk-free rate is 7%, and (5) variance of stock return is 0.16. Do not round intermediate calculations. Round your answer to the nearest cent.
risk-free rate have to be if they are correctly priced? (See Problems 19 and 20.) 11.4 CAPM Suppose the risk-free rate is 8 percent. The expected return on the market is 14 percent. If a particular stock has a beta of .60, what is its expected return based on the CAPM? If another stock has an expected return of 20 percent, what must its beta be? (See Problem 13.)
Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Factor Beta Factor Risk Premium Inflation 1.1 9% Industrial production 0.7 11 Oil prices 0.3 7 Required: If T - bills currently offer a 6% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises" become known. Factor Expected Value Actual Value Inflation 7 % 3% Industrial production 6 7 Oil prices 4 0 Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place.

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