(f) The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6 months' time. Security A pays $1 if the price of Stock Y in 6 months is $120, and zero otherwise. Security B pays $1 if the price of Stock Y in 6 months is $90, and zero otherwise. Security C pays $1 if the price of Stock Y in 6 months is $60, and zero otherwise. The prices of these securities are pa, PB , and pc, respectively. The discretely compounded risk-free interest rate is 5% per half-year (not annualised). When answering the questions below, explain your calculations. i. In the absence of arbitrage, what is the total cost of purchasing one unit each of securities A, B, and C? ii. If PB 0.2/1.05 - 0.190476, what is the value of a 6-month European call on Stock Y with an exercise price of $75?

(f) The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6 months' time. Security A pays $1 if the price of Stock Y in 6 months is $120, and zero otherwise. Security B pays $1 if the price of Stock Y in 6 months is $90, and zero otherwise. Security C pays $1 if the price of Stock Y in 6 months is $60, and zero otherwise. The prices of these securities are pa, PB , and pc, respectively. The discretely compounded risk-free interest rate is 5% per half-year (not annualised). When answering the questions below, explain your calculations. i. In the absence of arbitrage, what is the total cost of purchasing one unit each of securities A, B, and C? ii. If PB 0.2/1.05 - 0.190476, what is the value of a 6-month European call on Stock Y with an exercise price of $75?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 30% standard deviation of…

A: The required rate of return (RRR) is the minimum return an investor will accept for owning a…

Q: You are evaluating a loan request of $3.5 million from Precise Corp and the bank will require an…

A: In Economics, Nash equilibrium is the concept under game theory. It depicts the situation where no…

Q: Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100…

A: *Answer:

Q: 1. Consider a wine dealer who has k bottles of wine. The dealer can sell them now (t = 0) or can…

A: Given , Value of (k) bottles in t-th month : Vt =ket Risk free rate = r Putting values into the…

Q: The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2, where v is the…

A: The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2,

Q: strike price of $103. The call premium is The recent price per share of Company X is $103 per share.…

A: Given The recent price per share of Company X is $103 per share. You buy 100 shares at $50.…

Q: 8. Risk and return Suppose Frances is choosing how to allocate her portfolio between two asset…

A: An investment is an asset or item obtained determined to create income or appreciation. Appreciation…

Q: the stock market can be up 20% half the time or down 10% the other ha what is the risk of holding…

Q: You observe the E[IBM] = 8%, E[AAPL] = 12%, B(AAPL)=B(IBM)+2/3, Risk-free rate is 4%. What is the…

A: The expected return is the profit or loss percentage that the investor expects to receive from the…

Q: Elinore is asked to invest $4,900 in a friend's business with the promise that the friend will repay…

A: Opportunity cost: - opportunity cost is a forgone benefit that we could have earned by applying all…

Q: (i) (ii) Please specify the moneyness of the above options. Are they in the money, at the money, or…

A: Given, The price of the stock is $985

Q: 5. Find the expected value assuming the risk factor is 30% and the interest rate is 15%, if you will…

A: The expected value is an expected average value for an investment sooner or later. Investors utilize…

Q: Suppose Amy is choosing how to allocate her portfolio between two asset classes: risk-free…

A: An individual has two options of resource classes to dispense portfolio-hazardous gathering of…

Q: A corporation issues a two-year bond with a coupon of $50and a face value of $1,000. A year later,…

A: Bond valuation involves determining the fair price of a bond by considering factors such as the…

Q: Question A Call(50) = 9; Call(55) = 7; Put(50) = 7; Put(55) = 5. All options are on the same stock…

A: Call(50) = 9;Call(55) = 7;Put(50) = 7;Put(55) = 5.All options are on the same stock and have the…

Q: Create a butterfly. Select options suitable for a long butterfly strategy using options that expire…

A: In Long butterfly strategy calls are made through put ie one call is bought at low price and another…

Q: Which of the following statements about the current value of a short European call option on Warwick…

A: Introduction A European call option gives the owner the right to acquire the underlying security at…

Q: 49) If stock prices follow a random walk, it means that stock prices are just as likely to rise as…

A: The stock price is the current price that a share of stock is trading for on the market. The price…

Q: An investor allocates $30,000 and $50,000 to two assets (A1 and A2). These assets generate 5% and…

A: Value of an asset after returns is given as: F = P(1+R)F : value of asset including returnsP : value…

Q: If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?

A: The required return = return on risk free invested + risk premium So if the risk premium is 5…

Q: A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows…

A: The reservation value for a seller is the minimum price that a seller wishes to receive for the…

Q: Suppose that there is a 45 percent change that George's coffee shop will make $10000 in profits in…

A: Expected profit refers to the probability of getting a specific profit time the profit, and the…

Question

(f) The price of Stock Y, which is currently $80, can go to $120, $90, or $60 in 6
months' time. Security A pays $1 if the price of Stock Y in 6 months is $120, and
zero otherwise. Security B pays $1 if the price of Stock Y in 6 months is $90, and
zero otherwise. Security C pays $1 if the price of Stock Y in 6 months is $60, and
zero otherwise. The prices of these securities are pa, PB , and pc, respectively.
The discretely compounded risk-free interest rate is 5% per half-year (not
annualised). When answering the questions below, explain your calculations.
i.
In the absence of arbitrage, what is the total cost of purchasing one unit
each of securities A, B, and C?
ii.
If pg = 0.2/1.05 × 0.190476, what is the value of a 6-month European
call on Stock Y with an exercise price of $75?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step 5

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…
A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p-s and the buyer's payoffis b-p. Suppose simultaneously the buyer makes an offer p1 and the seller makes an offer p2. A transaction occurs if p1>=p2, and the transaction price is 1/2 (p1 + p2). Is the following strategy profile a Bayesian Nash equilibrium: the buyer chooses p1 = 1/2 if b>=1/2 and he chooses p1=0 if b<1/2; the seller chooses p2=1/2 if s<1/2 and she chooses p2=1 if s>1/2. Why or why not? Can there be a Bayesian Nash Equilibrium in which the transaction price is .9 whenever there is a transaction? Why or why not?
Question 3 (6.5 points): Hedge October 15th: A producer plans to sell wheat in early July; currently, July wheat futures are trading at 680'6. The expected basis is $0.60 under. July 1 • Does the producer have a long or short cash position? Does the producer have a long or short futures position? To hedge: The producer will per bushel. What is the expected cash price? (buy/sell) July wheat futures at 680'6 ⚫ The producer must (buy/sell) wheat locally in the cash market at 562'2 per bushel. To offset their future position, they must. 599'4 per bushel. • What is the actual basis? • (buy/sell) July futures at 。 Was the basis stronger, weaker, or the same as expected? What is the realized price for the producer? Method 1: 。 Method 2: 。 The hedge resulted in a realized price of
3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100? A.) Tyler must pay Alex $25,000. B.) Tyler makes a profit of $25 per barrel, or $25,000. C.) The contract becomes void because the price turned out lower than expected. D.) Alex must give Tyler $10,000.
Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below Stock Price 100 90 80 95 80 90 70 70 60 60 50 50 40 30 20 10 0 October November December January Feburary March (a) (b) O Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum…
Buena Vision Clinic is considering an investment that requires an outlay of $600,000 and promises a net cash inflow one year from now of $810,000. Assume the cost of capital is 10 percent. Required: 1. Break the $810,000 future cash inflow into three components: a. The return of the original investment b. The cost of capital c. The profit earned on the investment 2. Now, compute the present value of the profit earned on the investment. 3. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV?
15. If a financial institution has a portfolio that half (50%) consists of bonds with a tenor of five years and the other half is in the form of bonds with a duration of seven years, what is the duration/tenor of the financial institution's portfolio? A) 12 years B) 7 years C) 6 years D) 5 years 16. If the corporation/company begins to experience large losses, the default risk on the company's bonds will be A) increases and the uncertainty of bond returns increases, meaning that the expected return on the company's bonds will decrease. B) increases and the uncertainty of bond returns decreases, which means the expected return on the company's bonds will decrease. C) decreases and the uncertainty of bond returns decreases, which means the expected return of the company's bonds will decrease. D) decreases and the uncertainty of bond returns decreases, which means the expected return of the company's bonds will increase.
Question 11 The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is a) 36.30%. b) 5.84%. c) 19.60%. d) 24.17%. e) 26.0%.