Assume the Black-Scholes framework for a stock. You are given: i) The current stock price is 40 ii) The stock pays no dividends iii) The expected rate of appreciation is 16% iv) The stock' s volatility is 30% v) The Black-Scholes price of a 6-month 42-strike European call on the stock is 3.22 vi) The continuously compounded risk-free rate is 8% You just bought a 6-month straddle which pays the absolute difference between the stock price after 6 months a 42. Calculate the probability of having a positive profit after 6 months. Possible Answers A Less than 0.35 B At least 0.35 but less than 0.40 c At least 0.40 but less than 0.45 D At least 0.45 but less than 0.50 E At least 0.50
Assume the Black-Scholes framework for a stock. You are given: i) The current stock price is 40 ii) The stock pays no dividends iii) The expected rate of appreciation is 16% iv) The stock' s volatility is 30% v) The Black-Scholes price of a 6-month 42-strike European call on the stock is 3.22 vi) The continuously compounded risk-free rate is 8% You just bought a 6-month straddle which pays the absolute difference between the stock price after 6 months a 42. Calculate the probability of having a positive profit after 6 months. Possible Answers A Less than 0.35 B At least 0.35 but less than 0.40 c At least 0.40 but less than 0.45 D At least 0.45 but less than 0.50 E At least 0.50
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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Assume the Black-Scholes framework for a stock. You are given:
i) The current stock price is 40
ii) The stock pays no dividends
iii) The expected rate of appreciation is 16%
iv) The stock' s volatility is 30%
v) The Black-Scholes price of a 6-month 42-strike European call on the stock is 3.22
vi) The continuously compounded risk-free rate is 8%
You just bought a 6-month straddle which pays the absolute difference between the stock price after 6 months and
42.
Calculate the probability of having a positive profit after 6 months.
Possible Answers
A Less than 0.35
B At least 0.35 but less than 0.40
c At least 0.40 but less than 0.45
D
At least 0.45 but less than 0.50
E At least 0.50
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