Assume the following values when none is specified: So 100 \sigma = 20% T = 1K = 100 r = 5% We will add another stock to the mix with the following characteristics: Xo = 90 \sigma = 30% Assume the correlation \rho = 50% We want to value a spread option whose payoff is max(ST-XT - Kspread, 0) with Kspread = 81. UsingaMonte Carlomethodofyourchoice, whatisthe price,delta,gammaandthetaofthisderivative? 2. Plot how the price changes with different values of the correlation? Any intuitive explanation?

Assume the following values when none is specified: So 100 \sigma = 20% T = 1K = 100 r = 5% We will add another stock to the mix with the following characteristics: Xo = 90 \sigma = 30% Assume the correlation \rho = 50% We want to value a spread option whose payoff is max(ST-XT - Kspread, 0) with Kspread = 81. UsingaMonte Carlomethodofyourchoice, whatisthe price,delta,gammaandthetaofthisderivative? 2. Plot how the price changes with different values of the correlation? Any intuitive explanation?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

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APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .
Suppose you are given the following inputs for the Fama-Frech-3-Factor model. Required Return for Stock i: bi=0.8, kRF=8%, the market risk premium is 6%, ci=-0.6, the expected value for the size factor is 5%, di=-0.4, and the expected value for the book-to-market factor is 4%. Task: Estimate the required rate of return of this asset using the Capital asset pricing model and compare it with the Fama-French-3-factor model.
Suppose we estimate SBUX to have β=0.80 when the market premium is 9% and the risk free rate is 3%. However, if SBUX is currently priced to return 9%, then according to the CAPM model SBUX stock is currently _______________ . A) overvalued B) undervalued C) priced just right!
If put A has T = 0.5, X = 50, sigma = 0.2, and a price of 10, and put B has T = 0.5, X = 50, sigma = 0.2, and a price of 12, which put is written on a stock with a lower price (and why)?
1. Consider a one period binomial model. Suppose So = 1 att = To; and Su = 2 and Sd = ½ at time T₁. If we assume the risk free rate R is 1.2, compute the current value of a European put with strike K = 1. Please round your answer to 2 decimals. Enter answer here 2. Compute the number of units of stock we need to short in order to replicate the option in the previous question. Please round your answer to 2 decimals. Enter answer here 3. Use Black-Scholes Formula to calculate the call price of a European call option with: So = 20, K = 20, r = 5%, c = 0,0 = 40%, T = 5; (round to two decimal digits).
Please solve c part and get a thumbs up
We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80.a. Show that the range of S is 50, whereas that of P is 30 across the two states. What is the hedge ratio of the put?b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio?c. What is the present value of the portfolio?d. Given that the stock currently is selling at 100, solve for the value of the put.
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.
You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date.a. Draw the payoff graph for this strategy.b. Draw the profit graph for this strategy.c. If the underlying stock has positive beta, does this portfolio have positive or negative beta?
Given the following excess return index model regression results Ra*= -0.059616 + 0.957478Rm* where; \sigma M = 0.80226720, the return on the market portfolio is 0.085306, and the risk-free rate is 0.018302. Note Ra* and Rm* are excess returns. Calculate the actual return for Stock A. Round to 4 decimals, and present answer as a decimal (.08, not 8%) Answer: 0.0228
A security has an expected rate of return of 0.11 and has a beta (B) of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. Show whether this security is underpriced, fairly priced or overpriced. 1. The returns on share A follow the market model with coefficients aa = 0.01, Ba = 1.25. If at time t, K MT = 0.02 and the actual return on share A is 0.025, calculate EAt (the error term). 2. 3. An investor invests 30 percent of his wealth in a risky asset with an expected rate of return of 0.15 and a variance of 0.04 and 70 percent in a risk-free asset with a return of 0.06. Calculate the portfolio's expected return. 4. Toyota stock has the following probability distribution of expected prices one year from now: State Probability Price 1 25% 40% £50 2 £60 3 35% £70 Currently, each share is priced at £55. Toyota will pay a dividend of £4 per share at the end of the year. What is your expected holding-period return on Toyota? 5. According to the Capital Asset…