Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to buy a put option on the S&P 100 Index. The put carries a strike price of 913 and is quoted in the financial press at $14.509. Although the S&P index of 100 stocks is currently at 898.33, Dorothy thinks it will drop to 851 by the expiration date on the option. How much profit will she make, and what will be her holding period return if she is right? How much will she lose if the S&P 100 goes up (rather than down) by 35 points and reaches 933 by the date of expiration? The profit from this investment would be $ (Round to the nearest cent)

Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to buy a put option on the S&P 100 Index. The put carries a strike price of 913 and is quoted in the financial press at $14.509. Although the S&P index of 100 stocks is currently at 898.33, Dorothy thinks it will drop to 851 by the expiration date on the option. How much profit will she make, and what will be her holding period return if she is right? How much will she lose if the S&P 100 goes up (rather than down) by 35 points and reaches 933 by the date of expiration? The profit from this investment would be $ (Round to the nearest cent)

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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Donna Donie, an option analyst at UMB Students Managed Fund, believes that the market will be volatile in the near future, but Donie does not feel particularly strongly about the direction of the movement. With this expectation, Donie decides to buy both a call and a put with the same exercise price and the same expiration on the the TRT stock trading at 528. Donie buys one call option and one put option on TRT stock with the following exercise price and the premiums. TRT Materials Option Pricing Data (U.S.S) What is the name of the equity option strategy Donie has taken for the position? Characteristic Call Option Put Option Premium 54 S1 Strike Price $25 $25 Time to Expiration 90 days from now 90 days from now A. Bull spread strategy B. Straddle strategy C. Strangle strategy D. Protective put strategy
Joe is a new investor and has been closely watching a company by the name of USA Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine. Joe believes the following returns are possible in 2022 and has attached a probability to each potential outcome: Probability Possible Return .20 185.00% .30 83.50% .30 -5.00% .20 -100.00% c) Joe hired an experienced stock analyst, who advised Joe that based on his advanced modelling, the expected return and standard deviation for USA Ltd are at 7.50% and 45.00%, respectively. Using these new variables, detail the range of returns expected by investing in USA Ltd. at the 68% (one standard deviation) and 95% (two standard deviations) confidence levels. Show variables, calculation and a concluding statement in your response.
A rational investor is choosing to invest in either Fakebook stock, which is a tech company, or Abala Land, a real estate company. Both are hypothetical Philippine stocks. Their expected returns are 19% and 15%, and standard deviations of 39% and 30%, respectively. What will he most likely do? Invest in Fakebook stock because it earns more than Abala Land stock. Invest in Abala stock because it has a higher Sharpe ratio of 0.50 compared to Fakebook’s 0.49. Do not invest in Fakebook stock because it has a higher coefficient of variation of 2.05 than Abala Land’s 2.0. Invest in Abala stock, because it is less risky than Fakebook stock.
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM).
Rebecca is interested in purchasing a European call on a hot new stock, Up. Inc. The call has a strike price of $98.00 and expires in 95 days. The current price of Up stock is $117.67, and the stock has a standard deviation of 41% per year. The risk-free interest rate is 6.88% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note: Make sure to round all intermediate calculations to at least five decimal places.)
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Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $98.00 and expires in 95 days. The current price of Up stock is $115.36, and the stock has a standard deviation of 37% per year. The risk-free interest rate is 6.29% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note: Make sure to round all intermediate calculations to at least five decimal places.)
An investor receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. It is common for individual stocks to double the return of the S&P 500 and still be a "safe bet."
Greg is bullish on the stock of Google and expects the company to deliver excellent results. The stock of Google is currently trading at S100 and has volatility 15%. Greg decides to buy a call option on the stock with strike price $110 and expiration three months (t = 0.25). Assume a risk free interest rate of 4%. a. (5) Compute call option price using Black-Scholes formula. b. (5) Compute call option price using simulation and Black-Scholes assumptions.
You are considering investing in a technology stock but are concerned that the required return may be too low. You will not purchase the stock if the required return is below 13%. Will you purchase the stock given the following information: The expected return on the market is 10%; T-bill rates are 5%; the stock’s β is 1.5.
Investor Bill Johnston is interested in the stock of Designs Unlimited. There is 7 percent probability of a slower than normal economy, 22 percent probability of a normal economy, 46 percent probability of a better than average economy, and 25 percent probability of a fast growing economy. A stock has returns of −20.9 percent, 4.5 percent, 12.3 percent and 28 percent in these states of the economy, respectively. What is the stock's expected return?
JJ is a risk-averse investor, she cannot decide whether to invest in stock A or Stock B or in a portfolio that is a combination of both stocks. He has approached the bank and the company has provided her with the following information Probability (%) Expected return (%) Stock A Expected return (%) Stock B 30 13 15 20 14 13 20 15 12 30 16 11 Using these stocks, he has identified two investment portfolio alternatives: Alternative Portfolio 1 100% of A 2 30% of A and 60% of B Calculation the portfolio return and standard deviation for each alternative

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