The current price for a stock index is 1,000. The following premiums exist for various options to buy or sell thisstock index six months from now:Strike PricePremium($)9501,050Call120.4171.80OI and II only,Put Premium($)51.78101.21Strategy I is to buy the 1,050-strike call and to sell the 950-strike callStrategy II is to buy the 1,050-strike put and to sell the 950-strike putStrategy III is to buy the 950-strike call and to sell the 1,050-strike callAssume that the price of the stock index in 6 months will be between 950 and 1,050.Determine which, if any, of the three strategies will have greater payoffs in six months for lower prices of the stockindex than for relatively higher prices.Select one alternative:O III only.O II and III only.OI and III only.

A call option gives the right but not the obligation to buy at the strike price. A put option gives…

Answered: Determine which, if any, of the three…

Determine which, if any, of the three strategies will have greater payoffs in six months for lower prices of the stock index than for relatively higher prices.

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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Consider the following two scenarios in the economy and the returns in each scena for the market portfolio, an aggressive stock A, and a defensive stock B. a) Required: b) c) Scenario d) Bust Boom Market -8 percent 32 percent Rate of Return Aggressive Stock A -10 percent 38 percent Defensive Stock B -6 percent 24 percent Find the beta of each stock. Explain in what way is Stock B defensive. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the Treasury bill rate is 4 percent, calculate the CAPM for both stocks Based on your answers above, which stock is worth buying Explain your decision.
Please use Excel to evaluate the following three strategies: 1) short a straddle; 2) short a strangle; 3) long a butterfly spread. The current stock price is $100, the risk- free interest rate is 4.5% p.a. (continuous compounding), and the volatility of the stock is 42%. For straddles, set the exercise price X at $100. For strangles and butterflies, please examine three sets of exercise prices: ($70, $130), ($80, $120) and ($90, $110). For instance, for the exercise prices ($80, $120), the strangle would involve shorting a put with exercise price $80 and shorting a call with exercise price $120; the butterfly would involve buying calls with exercise prices $80 and $120 and shorting two calls with exercise price $100. Please calculate the net dollar position at maturity (i.e., payoff plus the future value of either investments - in the case of butterfly - or proceeds received from selling options) for each future stock price in the range of $60 to $140 with a $4 interval (i.e., $60,…
Consider the following two scenarios for the economy and the expected returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D. Scenario Rate of Return Market Aggressive Stock A Defensive Stock D Bust −7% −10% −5% Boom 19 25 15 Find the beta of each stock. If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock. If the T-bill rate is 4%, what does the CAPM say about the fair expected rate of return on the two stocks? Which stock seems to be a better buy on the basis of your answers to (a) through (c)?
a. Calculate the change in retur Security A's change in return w Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Security A BC Print Beta 1.63 0.62 -0.24 ---n Done X iod.
Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall. Given this forecast, which of the following statements is CORRECT? a. The required return on all stocks will remain unchanged. b. The required return will fall for all stocks, but it will fall more for stocks with higher betas. c. The required return for all stocks will fall by the same amount. d. The required return will fall for all stocks, but it will fall less for stocks with higher betas. e. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
what is the expected return and should you buy it?
WINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities. State of Economy Probability Rate of Return Stock A Stock B Boom 0.15 0.30 0.25 Normal 0.55 0.12 0.08 Recession 0.30 0.01 -0.05 i) Compute expected rate of return for each asset. ii) Compute variance and standard deviation of rate of return for each asset. iii) Which asset should they purchase?
Dotbomb’s stock has the following projected rates of return (outcomes): 10%, 15%,and 30%. The probabilities of their outcomes are 15%, 50%, and 35% respectively. a.What are the expected return and standard deviation of Dotbomb’s stock?b. What is the probability that Dotbomb stock will earn a return no more than 15%?c. What is the probability that Dotbomb stock will earn a return less than 15%
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Assume that the risk-free rate is 3.5% and the expected return on the market is 10%. What is the required rate of return on a stock with a beta of 0.7? Round your answer to two decimal places.
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