Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the year. There is a call option on Lett's stock with a strike price of $55 and an expiration date 1 year from now. What are the stock's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)

Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the year. There is a call option on Lett's stock with a strike price of $55 and an expiration date 1 year from now. What are the stock's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)

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 a call option on one share of BP with a strike price of $70 and exercise time 1 quarter (3 months). Suppose the current stock price for BP is S(0) = $65 per share. Suppose further that A(0) = $100, A(1) = $102 and two possible prices for S(1) are S $74 with probability 0.5, S(1) = $66 with probability 0.5. Evaluate the expected returns E(Ks) and E(Kc) for the stock and the option.
The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one-year risk-free rate is 5% and will remain constant. Using the binomial pricing model, the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
The stock price of Copious Corp. is currently $30. The stock price 1 year(s) from now will be either $34 or $27. The annual risk-free rate is 1.4%. Using the binomial model, what is the value of a call option with an exercise price of $30 and an expiration date 1 year(s) from now?
The current price of a stock is $21. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $22 and that expires in 1 year. (Hint: Use daily compounding.) Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.
There are call and put options on the shares in Nord AS with a redemption price of NOK 55 and one year to maturity. Today's share price is NOK 50. At the end of the year, the stock price will either be 30 kroner or 80 kroner. The risk-free interest rate of 3% per. year. a) What is the value of call options today? b) What is the value of the put options today if the put-buy parity holds? You have a portfolio of 2000 shares in Nord AS, but are starting to worry about that price. must fall. You therefore want to secure yourself by using options. c) Show how you can use call and put options to secure your position your. Explain.
A put option is currently selling for $5.8. It has a strike price of $65 and seven months to maturity. The current stock price is $71. The risk-free rate is 4.8 percent, and the stock will pay a $3.1 dividend in two months. What is the price of a call option with the same strike price? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price of a call option
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatility of the stock (standard deviation) is 0.30, and the rate of interest is 10 percent. A) What is the value of the option according to the Black-Scholes model if the price of the stock is $45, $50, or $55? B) What is the value of the option when the price of the stock is $50 and the option expires in six months, three months, or one month? C) What is the value of the option when the price of the stock is $50 and the interest rate is 5 percent, 10 percent, or 15 percent?
The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent. a. Suppose the current price of the company's stock is $75. What is the value of the call option if the exercise price is $65 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the current price of the company's stock is $75. What is the value of the call option if the exercise price is $80 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Call value b. Call value
The current stock price of Chocho inc is $120. You expect the stock price a year from now to be either $160.00 or $60.00 with equal probabilities. The interest rate at which investors can borrow is 10%. Using the binomial opm, what should be the price (premium) of a call option with an exercise price of $115.00 and an expiration date one year from now?
Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?
The current price of a stock is $33, and the annual risk-free rate is 4%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.52. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Do not round intermediate calculations. Round your answer to the nearest cent.
The current stock price is $10. In each of the next two years, the stock price can either go up by $2 or go down by $2. The stock pays no dividends. The one-year risk-free interest rate is 5% and will remain constant during this two-year period. a) Using the Binomial Model of option pricing, calculate the price of a two-year call option on the stock with a strike price of $13. b) Using Risk Neutral valuation calculate the price of two-year put option on the stock with a strike price of $7.

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