Greg is bullish on the stock of Google and expects the company to deliver excellent results. The stock of Google is currently trading at Si00 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%. (5) Compute call option price using Black-Scholes formula. (5) Compute call option price using simulation and Black-Scholes assumptions.

Greg is bullish on the stock of Google and expects the company to deliver excellent results. The stock of Google is currently trading at Si00 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%. (5) Compute call option price using Black-Scholes formula. (5) Compute call option price using simulation and Black-Scholes assumptions.

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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Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%. Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage? Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C. Beta / Sensitivity Factor Risk Premium Stock A Stock B Stock C Management Risk 5.5% 1.5 1.1 0.8 Interest Rate Risk 2.0% 0.8 0.5 0.4 Inflation Risk 3.5% 0.5 0.9 0.7
Your stockbroker, John Smith, calls you with a hot stock tip to buy SMITH Inc. The stock is currently selling for $25 a share. You gather the following data to evaluate Smith's recommendation. The risk free rate is 3%, and you demand a 14% return on the market portfolio. SMITH's current dividend is $2.50 a share. You decide to get other necessary estimates from a third-party, Rocky Enterprises. Rocky has estimated that SMITH's beta is 2.0 and that the stock's dividend will grow at a constant 10 percent rate. Based on your estimates, is Smith's recommendation to buy SMITH a good one? What do you think the stock is worth?
Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade call options for Learn Corp., whose stock is currently trading at $18.00. Suppose you are interested in buying a call option with a strike price of $25.20 that expires in 6 months. (Assume that you get the option for free!) Based on speculations and probability analysis, you compute and collect the following information for your price analysis of the option: • For LC’s options, time until expiration (t) is taken as 0.50 year (6 months/12 months). • LC’s stock could go up by a factor of 1.50 (u). • LC’s stock could decline by a factor of 0.60 (d). At this time, LC’s stock price is , and if you exercised the option, your payoff would be . Therefore, if the option is out-of-the-money, you exercise the option. Calculate the ending stock price of Learn Corp. for both possible outcomes and the payoff in both…
An analyst is studying the movement of the stock ABC. His research and came up with a different rates of return for ABC, 25% for strong and 10% for weak economic scenarios. Based on the latest economic outlook, the probability of having a strong, normal, and weak economy, are 30%, 50%, and 20%, respectively. The total expected return of ABC stock is 17% considering the various probabilities. Determine the rate of return of ABC if the economy turns normal.
CAN I GET HELP as soon as possible please Explain your answer for each of them. Show all your work. The required return on ABC stock is 14%. The risk-free rate of return is 4% and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14% The efficient market hypothesis suggests thatA) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy.C) buying into a mutual fund is a sensible strategy for a small investor.D) all of the above are sensible strategies.E) only A and B of the above are sensible strategies.
In the coming week, the outcomes from a class action lawsuit will result in a significant shock to the price of "M", which may be positive or negative. Thus, you decide to follow a Straddle strategy using a call option and a put option with strike 105, which have premiums of 16 and 9, respectively. If the stock price is 87 today, what is the total profit of your portfolio? Keep in mind that each call option contract controls 100 shares. Please round your answer to the nearest three decimals.

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