**Understanding European Put Options**A put option in finance allows you to sell a share of stock at a predetermined price in the future. There are different types of put options. A European put option enables you to sell a share of stock at a given price, called the exercise price, at a specific point in time after the purchase of the option. For instance, consider buying a six-month European put option for a stock with an exercise price of $26. If, after six months, the stock price per share is $26 or higher, the option is worthless. Conversely, if the stock price falls below $26 per share, you can buy the stock and swiftly sell it at the higher exercise price of $26.For example, if the per share price in six months is $22.50, you can acquire a share of the stock for $22.50 and then use the put option to sell the share for $26. Your profit is calculated as the difference, $26 − $22.50 = $3.50 per share, minus the cost of the option. If you paid $1.00 per put option, your profit would amount to $3.50 − $1.00 = $2.50 per share. The advantage of purchasing a European option is that it mitigates the risk of a decrease in the per-share price of the stock. If you bought 200 shares of the stock at $28 per share along with 70 six-month European put options with an exercise price of $26, each put option costs $1.**Task (a): Constructing a Model**Using data tables, design a model that exhibits the value of a portfolio with and without options considering a share price in six months ranging between $20 and $29 per share in $1 increments. Assess the benefit of the put options on the portfolio value for varying share prices. Note: for subtractive or negative numbers, use a minus sign even if there is a plus sign before the blank (Example: -300). If your answer is zero, enter “0.”| Share Price | Benefit of Options ||-------------|--------------------|| $20 | || $21 | || $22 | || $23 | || $24 | || $25 | || $26 | || $27 | || $28 | || $29 (b) Discuss the value of the portfolio with and without the European put options.The lower the stock price, the [Select your answer] beneficial the put options. The options are worth nothing at a stock price of $ [Select your answer] or [Select your answer]. There is a benefit from the put options to the overall portfolio for stock prices of $ [Select your answer].

An option is an agreement between two parties granting one the opportunity to purchase or sell a security from or to the other party at a predetermined future date. An option allows the buyer to either purchase or sell the asset at a certain price and date. Options can be a useful instrument for controlling risk, hedging against loss, and making predictions about price changes in different financial markets.a) The benefit of the put option is the maximum of difference between the strike price and the stock price or zero minus the premium paid.Calculation:Result:b) Put options are more advantageous when the stock prices are lower. At a stock price of $25 or higher, the options are worthless. For a stock price of $24 or lower, the put options provide value to the portfolio as a whole.a) Therefore, the benefits of options are:b) Put options are more advantageous in situations where the stock price is lower. At a stock price of $25 or higher, the options have no value. For stock prices at $24 or lower, the put options provide value to the portfolio.

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(a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example: -300). If you answer is zero, enter "0". Share Price Benefit of Options $20 $21 $22 $23 $24 $25 $26 $27 $28 $29 $ $ $ $ $ $ $ $ $

(a) Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example: -300). If you answer is zero, enter "0". Share Price Benefit of Options $20 $21 $22 $23 $24 $25 $26 $27 $28 $29 $ $ $ $ $ $ $ $ $

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 the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. ABC Po 86 46 92 le 100 200 200 Rate of return P1 91 41 102 Q1 100 1.89 % 200 200 P2 91 41 51 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) 22 100 200 400
Please solve only part a of this question in 2 hours and get a thumbs up
You are facing three stock investment alternatives, Stock A, Stock B and Stock C. Given the following information, please indicate which stock is (are) overvalued, which stock is (are) undervalued, and which stock is (are) correctly priced based on the required returns calculation using the Capital Asset Pricing Model (CAPM or Security Market Line=SML). The risk free rate is 3% and the risk premium for the market index return is 5%. Please Show Work Expected Stocks Returns BETA A 14% 1.2 B 8% 0.67 C 20% 2.5
Required Rate of Return Suppose rRF = 3%, rM = 8%, and rA = 7%. Calculate Stock A's beta. Round your answer to one decimal place. If Stock A's beta were 1.1, then what would be A's new required rate of return? Round your answer to one decimal place. %
A stock has a required return of 16%, the risk-free rate is 5.5%, and the market risk premium is 4%. a) What is the stock's beta? b) If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two for one in the last period. Stock A B C Po 90 45 80 90 425 450 650 a. Rate of return b. New divisor c. Rate of return P1 95 40 90 91 425 450 650 % P2 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t= 1). Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. Calculate the new divisor for the price-weighted index in year 2. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Calculate the rate of return for the second period (t=1 to t = 2). Note: Round your answer to 2 decimal places. % 92 425 450 95 40 45 1,300
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 3.6% + 1.2RM + eA RB = -1.6% + 1.5RM + eB OM = 16%; R-squarea = 0.25; R-square; = 0.15 What is the covariance between each stock and the market index? (Calculate using numbers in decimal form, not percentages. Do not round your intermediate calculations. Round your answers to 3 decimal places.) Covariance Stock A Stock B
Data: S0 = 102; X = 115; 1 + r = 1.1. The two possibilities for ST are 146 and 84. Required: The range of S is 62 while that of P is 31 across the two states. What is the hedge ratio of the put? Form a portfolio of one share of stock and two puts. What is the (nonrandom) payoff to this portfolio? What is the present value of the portfolio? Given that the stock currently is selling at 102, calculate the put value.
Calculate the rate of return on a price-weighted index of the three stocks for the first period (t = 0 to t = 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Consider the three stocks in the following table. Pt represents price at time t, Qt represents shares outstanding at time t. Stock C splits two for one in the second period from t=1 to t=2. Calculate the rate of return on a price-weighted index consisting of the three stocks for the first period from t=0 to t=1. Answer in percentage. Answer options: 0.00% 2.49% 6.06% 8.95% 1.30%
Scenario 2: The following table shows the returns for the market index (Market - M) and the returns for two stocks (Asset X & Y) under three scenarios. Assume each scenario has an equal chance of occurring (33%). Bad Okay Good Market - M-5% 5% 15% Asset - X -2%-3% 25% Asset - Y -4%-6% 30% What is the correlation of "Asset - Y" to "Market M"? enter your number to two decimal places without the percent sign. Example 23% enter as .23.
Consider the three stocks in the following table. Pt represents price at time t, and Qt represents shares outstanding at time t. Stock C splits two-for-one in the last period. A B C Po 82 42 84 00 100 200 200 Divisor P1 87 37 94 01 100 200 200 P2 87 37 47 92 100 200 400 Required: a. Calculate the rate of return on a price-weighted index of the three stocks for the first period (t=0 to t= 1). (Do not round intermediate calculations. Round your answer to 2 decimal places.) Rate of return I % b. What will be the divisor for the price-weighted index in year 2? (Do not round intermediate calculations. Round your answer to 2 decimal places.) D c. Calculate the rate of return of the price-weighted index for the second period (t=1 to t = 2).

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