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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![### Option Pricing Exercise
This section aims to guide you through the process of calculating intrinsic values and adjusted intrinsic values for call options, considering different interest rates and time to expiration.
#### Part a: Calculating Intrinsic Value
**Task:** Calculate the intrinsic value for each of the following call options. (Round your answers to 2 decimal places.)
| Company | Time to Expiration (months) | Strike | S0 | Intrinsic Value |
|-----------|------------------------------|--------|-------|-----------------|
| RJay | 1 | 60 | 62.77 | |
| RJay | 2 | 70 | 62.57 | |
| Sell-Mart | 5 | 60 | 67.80 | |
| Xenon | 6 | 7.50 | 6.48 | |
To calculate intrinsic value:
\[ \text{Intrinsic Value} = \max(S0 - \text{Strike}, 0) \]
#### Part b: Adjusting Intrinsic Value with Interest Rates
**Task:** Now assume that the effective annual interest rate is 7.18%, which corresponds to a monthly interest rate of 0.58%. Calculate the present value (PV) of each call option’s exercise price and the adjusted intrinsic value for each call option. (Round your answers to 2 decimal places.)
| Company | Time to Expiration (months) | Strike | S0 | PV(X) | Adjusted Intrinsic Value |
|-----------|------------------------------|--------|-------|-------|--------------------------|
| RJay | 1 | 60 | 62.77 | | |
| RJay | 2 | 70 | 62.57 | | |
| Sell-Mart | 5 | 60 | 67.80 | | |
| Xenon | 6 | 7.50 | 6.48 | | |
To calculate the present value of the exercise price:
\[ PV(X) = \text{Strike} \times e^{-rt} \]
Where:
- \( r \) is the monthly interest rate (0.0058)
- \( t \) is the time to expiration in months
To calculate the adjusted intrinsic value:
\[ \text{Adjusted Intrinsic Value}](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1fd60a6-e122-44a6-b63f-53f11d7f8fb8%2F8afa05ef-c900-4660-abc2-674f4b8c1873%2Fhrn2rs7_processed.png&w=3840&q=75)
Transcribed Image Text:### Option Pricing Exercise
This section aims to guide you through the process of calculating intrinsic values and adjusted intrinsic values for call options, considering different interest rates and time to expiration.
#### Part a: Calculating Intrinsic Value
**Task:** Calculate the intrinsic value for each of the following call options. (Round your answers to 2 decimal places.)
| Company | Time to Expiration (months) | Strike | S0 | Intrinsic Value |
|-----------|------------------------------|--------|-------|-----------------|
| RJay | 1 | 60 | 62.77 | |
| RJay | 2 | 70 | 62.57 | |
| Sell-Mart | 5 | 60 | 67.80 | |
| Xenon | 6 | 7.50 | 6.48 | |
To calculate intrinsic value:
\[ \text{Intrinsic Value} = \max(S0 - \text{Strike}, 0) \]
#### Part b: Adjusting Intrinsic Value with Interest Rates
**Task:** Now assume that the effective annual interest rate is 7.18%, which corresponds to a monthly interest rate of 0.58%. Calculate the present value (PV) of each call option’s exercise price and the adjusted intrinsic value for each call option. (Round your answers to 2 decimal places.)
| Company | Time to Expiration (months) | Strike | S0 | PV(X) | Adjusted Intrinsic Value |
|-----------|------------------------------|--------|-------|-------|--------------------------|
| RJay | 1 | 60 | 62.77 | | |
| RJay | 2 | 70 | 62.57 | | |
| Sell-Mart | 5 | 60 | 67.80 | | |
| Xenon | 6 | 7.50 | 6.48 | | |
To calculate the present value of the exercise price:
\[ PV(X) = \text{Strike} \times e^{-rt} \]
Where:
- \( r \) is the monthly interest rate (0.0058)
- \( t \) is the time to expiration in months
To calculate the adjusted intrinsic value:
\[ \text{Adjusted Intrinsic Value}
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