Example 14 K, An investor buys for $3 a 3-month European call with a strike price of $30 and sells for $1 a 3-month European call with a strike price of $35. The payoff from this bull spread strategy is $5 if the stock price is above $35, and zero if it is below $30. If the stock price is between $30 and $35, the payoff is the amount by which the stock price exceeds $30. The cost of the strategy is $3 - $1 = $2. So the profit is: *Copyright, JC Hull

Example 14 K, An investor buys for $3 a 3-month European call with a strike price of $30 and sells for $1 a 3-month European call with a strike price of $35. The payoff from this bull spread strategy is $5 if the stock price is above $35, and zero if it is below $30. If the stock price is between $30 and $35, the payoff is the amount by which the stock price exceeds $30. The cost of the strategy is $3 - $1 = $2. So the profit is: *Copyright, JC Hull

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4P: An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

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A. Consider a stock worth K12.50 that can go up or down by 15% per period. Assume aperiod process of one. The risk-free rate is 10%. Find the value of the call optiontoday, with the strike price of K11.50. B. What is the price of a European put option on a non-dividend paying stock when thestock price is K69, the strike price is K70, the risk-free rate is 5% per annum, thevolatility is 35% per annum, and the time to maturity is 6 months?
An investor purchases a call for CL0 = $3.00 with a strike of X = $40 and sells a call for CH0 = $1.00 with a strike price of $50. Compute the profit of a bull call spread strategy when the price of the stock is at $45.
In this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt + o Sdw, where dw is the standard Wiener process and u = 0.13 and o = current stock price is $100 and the stock pays no dividends. 0.20 are constants. The Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.
3) Suppose that the price of a non-dividend-paying stock is $27, its vo itility is 20%, and the risk- free rate for all maturities is 6% per annum. Provide a table showing the relationship between profit and final stock price for a butterfly spread using European put option with strike prices of $20, $25, and $30 and a maturity of one year. Ignore the impact of time a e of money.
Consider a European call on Procter and Gamble stock (PG) that expires in one period. The current stock price is $120, the strike price is $130, and the risk-free rate is 5%. Assume that PG stock will either go up to $150 (probability = .4), or go down to $90 (probability = .6). Construct a replicating portfolio based on shares of PG stock and a position in a risk-free asset, and compute the price of the call option.
A one-year European call option on a stock with a strike price of $30 costs $3; a one-year European put option written on the same stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is ______. A: 40 B: 20 C: 25 D:35
Suppose a stock is currently trading for $35, and in one period it will either increase to $38 or decrease to $33. If the one-period risk-free rate is 6%, what is the price of a European put option that expires in one period and has an exercise price of $35? $0.51 $2.32 $1.55 $3.00 $0.76
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Question I: Suppose the S&R index is 800, the continuously compounded risk-free rate is 5%, and the dividend yield is 0%. A 1-year 815-strike European call costs $75 and a 1-year 815-strike European put costs $45. Consider the strategy of buying the stock, selling the 815-strike call, and buying the 815-strike put. (a) What is the rate of return on this position held until the expiration of the options? (b) What is the arbitrage implied by your answer to (a)? (c) What difference between the call and put prices would eliminate arbitrage? (d) What difference between the call and put prices eliminates arbitrage for strike prices of $780, $800, $820, and $840?
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