A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should Multiple Choice write the call and buy the put write the call and buy the put and buy the stock and borrow the present value of the exercise price

A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should Multiple Choice write the call and buy the put write the call and buy the put and buy the stock and borrow the present value of the exercise price

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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Consider stocks of Firms A and B. Their expected returns are 12% and 11%, respectively, and the volatilities of their returns are 8% and 10%, respectively. Firm A has a market beta of 1.5 and Firm B has a market beta of 1.0, and the correlation between the two stocks is 0.5. Your risk-averse client wants to invest $5 million with an expected return of 15%. You can put together a portfolio with the market index, Firm A, Firm B, and a risk-free asset. Which of these four securities would you include in the portfolio and how much would you invest in each security?
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.
Please use Excel to evaluate the following three strategies: 1) short a straddle; 2) short a strangle; 3) long a butterfly spread. The current stock price is $100, the risk- free interest rate is 4.5% p.a. (continuous compounding), and the volatility of the stock is 42%. For straddles, set the exercise price X at $100. For strangles and butterflies, please examine three sets of exercise prices: ($70, $130), ($80, $120) and ($90, $110). For instance, for the exercise prices ($80, $120), the strangle would involve shorting a put with exercise price $80 and shorting a call with exercise price $120; the butterfly would involve buying calls with exercise prices $80 and $120 and shorting two calls with exercise price $100. Please calculate the net dollar position at maturity (i.e., payoff plus the future value of either investments - in the case of butterfly - or proceeds received from selling options) for each future stock price in the range of $60 to $140 with a $4 interval (i.e., $60,…
1.
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Consider a market where there are N rational traders. All of these traders have CARA preferences with risk aversion parameter γ = .5. They are considering a stock that will pay a terminal dividend in the next period. The expected payoff of the dividend is $100 per share with a standard deviation of $10. Assume that the discount rate is zero. That is, don’t worry about discounting future payoffs. a) If there are 10 shares of the stock available, what is the price of the stock as a function of N? b) Does the price increase or decrease as N increases? Explain the intuition of this result. c) If N = 10, what is the price of the stock? How does the price change if γ increases to .6? Explain the intuition for why the price moves this direction when γ increases.
Hi, How do i solve this problem using a formula or financial calculator? Two securities, A and B, are available for trading. Prices (at t=0) and future payoffs (at t=1) in bothstates are given in the following table. Assume that both states are equally likely (50% chance of each). There is another security, call it C, whose payoff at t=1 is equal to $300 in the weak state and$600 in the strong state. Find the no-arbitrage price (at t=0) of security C What is the risk-free rate of return in this economy?
The expected rate of return for the stock of Cornhusker Enterprises is 20 percent, with a standard deviation of 15 percent. The expected rate of return for the stock of Mustang Associates is 10 percent, with a standard deviation of 9 percent. a. Which stock would you consider to be riskier? Why? b. If you knew that the beta coefficient of Cornhusker stock is 1.5 and the beta of Mustang is 0.9, how would your answer to Part a change?
You are managing a pension fund with a value of $360 million and a beta of 1.30. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many contracts do you need if the delta of the call option is 0.64 and the S&P index is currently at 3, 300 ? Note: Do not round intermediate calculations. A negative value should be indicated by a minus sign. Round your answer to the nearest whole number.
Please help me
Your portfolio consists of two stocks. Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22% Aggressive Stock -3% 40% Defensive Stock 8% 11% The probability of the pessimistic (optimistic) scenario is 90% (10%) and the risk-free rate is 3%. What is the equation of SML and should you increase or decrease the weights of these two stocks in your portfolio? Please keep 2 decimals in your answer.
Solve the following questions If the expected return on a stock is 10 per cent. Risk free rate ot returm is 4 per cent and market return is 14 percent, What must be the etaT If the value of expected return of Galfar Engineering 14 per cent, if Beta is 12 and market retum is 16 per cent. What must be the k free rate If the expected return on a stock is 15 per cent, if the beta is 0.8 and risk free.rate of return is 8 per cent. What must be the return on the market? 16.75 96 18.50 % 19.25 9% 22.63 %

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