Consider a call option on one share of BP with a strike price of $70 and exercise time 1 quarter (3 months). Suppose the current stock price for BP is S(0) = $65 per share. Suppose further that A(0) = $100, A(1) = $102 and two possible prices for S(1) are S $74 with probability 0.5, S(1) = $66 with probability 0.5. Evaluate the expected returns E(Ks) and E(Kc) for the stock and the option.

Consider a call option on one share of BP with a strike price of $70 and exercise time 1 quarter (3 months). Suppose the current stock price for BP is S(0) = $65 per share. Suppose further that A(0) = $100, A(1) = $102 and two possible prices for S(1) are S $74 with probability 0.5, S(1) = $66 with probability 0.5. Evaluate the expected returns E(Ks) and E(Kc) for the stock and the option.

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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Suppose an investor buys 20 share of a particular stock at R10 per share and sell them all a year from now. The possibilities in one year's time are either, the stock will be worthless, with probability 0.2, you will break even, with probability 0.5 or the value of the stock will double, with probability 0.3. Let a random variable X the investor's gain from buying the 20 shares. The variance of gains from purchasing the stock is O A. 1400 ОВ. 19600 )с. 35476 O D. 14420
With all other variables being equal (the same excerise price, underlying asset, implied volatility, interest rate, etc.), an at-the-money option with 30 days to expiration will tpyically have a gamma that is higher than an at-the-moeny option with 180 days to expiration (hint: think of the different shapes of the associated probability distribution and the change in delta) True or False?
Suppose that Stock XYZ is currently trading at $50 and does not pay any dividends. Using a binomial tree with two periods, we would like to price a European down-and-in call option written on this stock with a strike price of $40, barrier level of $48 and expiration date in three months. Assume that annual continuously compounded interest rate is 5% and the volatility of the stock is 20% per year. What is the price of the barrier option? 0.7.28 0.9.45 O101 O 322
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please answer as soon as possible?
The share price of your favourite company is currently traded at a price of £80 and interest is compounded continuously at rate 3.7% per year. Assume that the share evolves according to a discrete time LogNormal process with time measured in years, 0.15 and volatility o = 0.24 drift µ . You decide to buy a European call option with a strike price of £84 and an expiration date of two years from now. What is the no-arbitrage price for this option? State your answer to the nearest pence. Do not enter the pound sign. =
Assume the one period binomial model with initial share price £400, up and down factors u = 1.25, d = 0.9 and interest compounded at nominal rate (per time period) of 5%. Consider an option with payoff (S(0) + S(1))/2. The replicating portfolio for this option at time 0 will have shares and pounds in a bank. State your answers to three significant figures.

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