Carefully draw the payoff diagram of a portfolio consisting of one call option with exercise priceK%, short two call options with delivery price 2K% and long three call options with delivery price3K. All options have the same maturity date and the same underlying stock. What reasons could a speculatorhave for holding such a portfolio?[9 Marks]

Payoff Diagram of the PortfolioUnderlying Stock Price (X-axis):This axis represents the possible…

Answered: Carefully draw the payoff diagram of a…

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

See similar textbooks

Similar questions

portfolio.. - Word **** References Mailings Review View Help RCM Acrobat Foxit Reader PDF Foxit PDF 5. The risk-free rate and the expected market rate of return are 0.04 and 0.14, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.25 is equal to: a. 0.004 b. 0.165 C. 0.121 d. 0.132
Problem 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .75, -1.2, .90, 1.3, 1.5. The risk free return is 4% and the market return is 9%. A. Compute the beta of the portfolio B. Compute the required return of the portfolio
(Security market line) You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock are found below Asset A Beta 2.30 B C D 0.80 0.60 -1.60 (Click on the icon in order to copy its contents into a spreadsheet.) a. What is the portfolio beta for your proposed investment portfolio? b. How would a 25 percent increase in the expected return on the market impact the expected return of your portfolio? c. How would a 25 percent decrease in the expected return on the market impact the expected return on each asset? d. If you are interested in decreasing the beta of your portfolio by changing your portfolio allocation in two stocks, which stock would you decrease and which would you increase? Why? a. The portfolio beta for your proposed investment portfolio is (Round to three decimal places)
Let S = $100, K = $95, \sigma = 30%, r = 8%, T = 1, and \delta = 0. For simplicity, let u = 1.3, d = 0.8 and n = 2 (that is, 2 periods). When constructing the binomial tree for the European call option, what is A (Stock Share Purchased in the replicating portfolio) at the first node (Time 0)? Question 11 options: 0.1789 0.3886 1.0000 0.2550 0.6912
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.
Consider the 1-period binomial model with a bond with A(0) = 60 and A(1) = 70 and a stock with S(0) = 4X and S^u(1) 6Y and S^d(1) = 3Z. = 1. What is the price (payoff) C(1) of a call option with strike price 28? 2. same... with strike price 45? 3. same... with strike price 72? 4. Set up a system of linear equations to determine a replicating portfolio for the call option from part 2 (strike price 45). 5. Solve it and determine the price C(O). 6. Compute, tabulate, and plot the price C(O) as you vary the strike price of the option from 28, 29, ..., 71, 72.
Construct a hedge portfolio and by using the binomial option pricing model and find the values of Pu and Pd; and P. Explain the answer and describe the hedge portfolio. A stock currently priced at $100. One period later it can go up to $125, an increase of 25 percent, or down to $80, a decrease of 20 percent. Assume a put option is available with an exercise price of $100. Consider the example in a two-period world. The risk-free rate is 7 percent. The inputs are summarized as follows S = 100 d = 0.80 u = 1.25 X= 100 r = 0.07
By looking at the sensivities of your portfolio to ds = -$2 and So = -1%, you decide to hedge delta, gamma and Vega risk of your portfolio with the underlying stock and two different options on the same asset with below data. Calculate the units of stock you need to trade to hedge away all delta, gamma and Vega risks of your portfolio.(Note that here you have to calculate the units of stock, Option A and Option B, but you will only submit the units of stock.) Variable Option A Option B Delta (A) -0.5 0.2 Gamma (T) 0.2 0.1 Vega (v) 8
You have developed the following data to examine the impact of portfolio diversification. Which scenario seems to be out of place? # of stocks in the portfolio Diversifiable Risk Market Risk L. 2 stocks M. 20 stocks N. 30 stocks O. 60 stocks P. 100 stocks ΟΝ OL O M P 0.15 0.07 0.11 0.08 0.06 0.20 0.20 0.20 0.20 0.20
A. An option is trading at $5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55? B. What type of option is this and how? C. With a delta of -.56, is this option ITM, ATM or OTM and how?
Consider a portfolio consisting of one share and several European call options with the same expiry, but different strike prices. The payoff diagram of the portfolio is given by the following figure. Find the strike prices and the positions of each call option. Portfolio payoff 25 20 15 10 15 20 25 30 Stock price Payoff

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS