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A. Your employer is offering you stock o your pay package. You know the foll Current Stock Price Exercise Price Maturity (yrs) Risk-free Rate Stock Yolatility

A. Your employer is offering you stock o your pay package. You know the foll Current Stock Price Exercise Price Maturity (yrs) Risk-free Rate Stock Yolatility

Essentials Of Investments
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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4. Options and Futures A. Your employer is offering you stock options on the firm as part of your pay package. You know the following about this offer: Current Stock Price Exercise Price Maturity (yrs) Risk-free Rate Stock Volatility $23 $28 2 2.25% 23% What is the value of the option? Suppose the Fed reduces Treasury rates to 2.0%, what is the new price of the option? After the rate reduction, your company's share price rises to $25, what is the new price of the option? B. Your cousins grow corn in Wisconsin and plan to harvest 7,000,000 bushels at the end of the season. They are unsure whether to sell the futures contracts and lock the price in at $5.05/bushel or take a gamble and sell it all at the spot price at season's end. They think they can get $4.50/bushel based on historical prices and their own analysis. Assuming no transaction costs and each contract covers 5,000 bushels, what will the cousins' profit/loss be if they sell the contracts and the spot price is $4.85 at maturity? Ukraine had a bumper harvest and spot prices fall to $4.70/bushel, what will the cousins' profit/loss be now?
Transcribed Image Text:4. Options and Futures A. Your employer is offering you stock options on the firm as part of your pay package. You know the following about this offer: Current Stock Price Exercise Price Maturity (yrs) Risk-free Rate Stock Volatility $23 $28 2 2.25% 23% What is the value of the option? Suppose the Fed reduces Treasury rates to 2.0%, what is the new price of the option? After the rate reduction, your company's share price rises to $25, what is the new price of the option? B. Your cousins grow corn in Wisconsin and plan to harvest 7,000,000 bushels at the end of the season. They are unsure whether to sell the futures contracts and lock the price in at $5.05/bushel or take a gamble and sell it all at the spot price at season's end. They think they can get $4.50/bushel based on historical prices and their own analysis. Assuming no transaction costs and each contract covers 5,000 bushels, what will the cousins' profit/loss be if they sell the contracts and the spot price is $4.85 at maturity? Ukraine had a bumper harvest and spot prices fall to $4.70/bushel, what will the cousins' profit/loss be now?
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