Assume the Black-Scholes framework. For a non-dividend paying stock, you are given: i. The stock' s continuously compounded expected rate of return is 7%. ii. The continuously compounded risk-free interest rate is 3%. iii. The stock' s volatility is 25%. iv. The price of an at-the-money 1-year European call option on the stock is 13.05. Calculate the stock' s current price. Possible Answers A Less than 110 B At least 110 but less than 120 190 L 120

Assume the Black-Scholes framework. For a non-dividend paying stock, you are given: i. The stock' s continuously compounded expected rate of return is 7%. ii. The continuously compounded risk-free interest rate is 3%. iii. The stock' s volatility is 25%. iv. The price of an at-the-money 1-year European call option on the stock is 13.05. Calculate the stock' s current price. Possible Answers A Less than 110 B At least 110 but less than 120 190 L 120

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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*NoChatGPT answers please 6A) What is the price of a European call option on a non-dividend-paying stock when the stock price is $52, the strike price is $50, the risk-free interest rate is 12% per annum, the volatility is 30% per annum, and the time to maturity is 3 months? 6B) What is the assumption of the Black–Scholes–Merton stock option pricing model about the probability distribution of the stock price in one year? What is the assumption about the probability distribution of the continuously compounded rate of return on the stock during the year?
Consider a European call on Procter and Gamble stock (PG) that expires in one period. The current stock price is $120, the strike price is $130, and the risk-free rate is 5%. Assume that PG stock will either go up to $150 (probability = .4), or go down to $90 (probability = .6). Construct a replicating portfolio based on shares of PG stock and a position in a risk-free asset, and compute the price of the call option.
In this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt + o Sdw, where dw is the standard Wiener process and u = 0.13 and o = current stock price is $100 and the stock pays no dividends. 0.20 are constants. The Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.
In this problem, we derive the put-call parity relationship for European options on stocks that pay dividends before option expiration. For simplicity, assume that the stock makes one dividend payment of $D per share at the expiration date of the option.a. What is the value of a stock-plus-put position on the expiration date of the option?b. Now consider a portfolio comprising a call option and a zero-coupon bond with the same maturity date as the option and with face value (X + D). What is the value of this portfolio on the option expiration date? You should find that its value equals that of the stock-plus-put portfolio regardless of the stock price.c. What is the cost of establishing the two portfolios in parts (a) and (b)? Equate the costs of these portfolios, and you will derive the put-call parity relationship.
Assume the following data for a stock: Risk - free rate market) == 1.5; beta (size) = 0.3; beta (book-to-market) = 5 percent; beta ( = - 1.1; market risk premium 1 7 percent; size risk premium 3.7 percent; and book - to - market risk premium = 5.2 percent. Calculate the expected return on the stock using the Fama - French three-factor model.
4. Consider a stock with a current price of S0 = $60. The value of the stock at time t = 1 can take one of two values: S1,u = $100, S1,d = $40. The price of a risk-free bond that pays out $1 in period t = 1 is $0.90. (a) Using a one-step binomial tree, write down the possible payoffs of a put option on stock S with strike K = $60 and maturity t = 1. (b) What is the price of this put option? (c) What is the price of a call option with strike K = $60 and maturity t = 1? Please use put-call parity to find the call price.
Use the Black-Scholes formula to find the value of a call option based on the following inputs. (Round your final answer to 2 decimal places. Do not round intermediate calculations.) Stock price Exercise price Interest rate Dividend yield Time to expiration Standard deviation of stock's returns Call value GA $ $ $ 48 60 0.07 0.04 0.50 0.26
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A) What expected return should an investor expect from investments in common stock? You are given the following information: Risk free rate of return = 4%; market risk premium = 11%; Beta of the stock (assume CAPM holds) = 0.72. B) Stock A with beta of 0.8 offers a 11% return while stock B with a beta of 1.2 offers a 15% return. What is the risk-free rate? What is the common market return? Assume CAPM holds.
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question is related to FINANCIAL RISK MANAGEMENT
In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. Calculate the price of a put option by RNVR.

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