A two-year European call option is written on a stock whose current price is $20. The stock will pay a dividend of $1 three months from now and another $1 one and half years from now. The strike price is $18, and the riskfree interest rate is 5%. Then the tightest lower bound for the call option value is, $1.8976 $1.535 $1.194 a. b. с. d. $1.7976.
A two-year European call option is written on a stock whose current price is $20. The stock will pay a dividend of $1 three months from now and another $1 one and half years from now. The strike price is $18, and the riskfree interest rate is 5%. Then the tightest lower bound for the call option value is, $1.8976 $1.535 $1.194 a. b. с. d. $1.7976.
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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Transcribed Image Text:A two-year European call option is written on a stock whose current price is $20.
The stock will pay a dividend of $1 three months from now and another $1 one
and half years from now. The strike price is $18, and the riskfree interest rate is
5%. Then the tightest lower bound for the call option value is,
6.
$1.8976
$1.535
$1.194
a.
b.
с.
d.
$1.7976.
Six-month call options with strike prices of $25 and $30 cost $4 and $3
respectively. Then the maximum possible gain and loss from a bear spread
7.
formed using the two calls are respectively
$10 and infinity
$10 and $10
$1 and $4
$4 and $1
$10 and $5
а.
b.
c.
d.
е.
Twelve-month European put options with strike prices of $35, $30, and $25 cost
$7, $3.5, and $2 respectively. Then the maximum possible gain and loss from a
butterfly spread formed using the three puts are respectively
8.
a.
$4.5 and infinity
b.
$4.5 and $0.5
$0.5 and $4.5
$3 and $0.5
$10 and $4.5
c.
d.
е.
9.
A three-month call with a strike price of $20 costs $1. A three-month put with a
strike price of $15 costs $2. A trader uses the options to create a strangle. For
what two values of the terminal stock price does the trader breakeven with a profit
of zero?
$23 and $12.
$20 and $25.
$15 and $25.
a.
b.
с.
d.
$12 and $23.
10.
Consider a European call option on a currency. The exchange rate is 1.135, the
strike price is 1.130, the time to maturity is one year, the domestic risk-free rate is
5% per annum and the foreign risk-free rate is 3% per annum. What is the lower
bound to the option price?
а.
$0.0266.
$0.0148.
$0.0286.
$0.0281.
b.
C.
d.
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