Options are often used in combination with stocks to reduce risk or to produce other avenues of revenue.Buying protective puts guards against downside risk while allowing for upside potential.Writing covered calls allow investors to earn premium income on a stock they expect to remain stable in price.Wang Foo Ltd. has a current stock price of $100, does not pay dividends, and has an expected standard deviation of .20. Also, the risk-free rate is 6% per year, continuously compounded.The Call option price is $13.85The Put option Price is $1.19.1. What will be the payoff and profit of the protective put if the stock price on maturity is $80, $84, $90, $100, $110?1. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

2. Covered Call Payoff and Profit Calculation: Covered Call Strategy: Involves holding the stock and…

Answered: Options are often used in combination…

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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g. BABA is a volatile stock and its stock price is expected to fluctuate within ±+50% from its current price level ($20). To avoid getting a marginal call, Jeremy can put more cash into his brokerage account when he first establishes the long position, i.e., his initial margin is larger than the IMR which is at 50%. What is the initial margin such that he will never get a margin call? Assume the price drop happens immediately after he purchases the stock.
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A stock has not been fluctuating much in price. Its average price is $20/share. You expect that the stock price behaves the same way in the next year. A one-year put option is selling for $5, which has an exercise price of $20. Suppose the risk-free rate is 0.05. To make use of your expectation in the future price movement, you establish a straddle strategy to maximize your profits. If the stock price actually ends up at $20 in a year, your profit is $ . Give your answer to 2 decimal places.
A stock can either return -10% in recession or a +20% when the economy is doing well. If both possibilities are equally likely what is the expected return and standard deviation. If the T.Bill rate is 5% and investors conlude that that the stock is neither overpriced or underpriced )priced right), what must be the market risk of the stock. Explain.
If a firm cannot invest retained earnings to earn a rate of return______________ (Pick either A- greater than or equal to or B- Less than) the required rate of return on retained earnings, it should return those funds to its stockholders. The current risk-free rate of return is 4.60% and the current market risk premium is 6.10%. Green Caterpillar Garden Supplies Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Green Caterpillar’s cost of equity is_____________% Cute Camel Woodcraft Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Cute Camel’s bonds yield 10.20%, and the firm’s analysts estimate that the firm’s risk premium on its stock relative to its bonds is 3.50%. Using the bond-yield-plus-risk-premium approach, the firm’s cost of equity is___________% The stock of Cold Goose Metal Works Inc. is currently selling for $25.67, and the firm expects its dividend to be $2.35…
The stock of BP, a flood insurance provider, has a marketed beta of .8. The risk free rate is 3%. You estimate that the market risk premium is 5%. Compute the expected return for BP stock. Assume that BP’s true expected return is 8%. What is BP’s stock’s alpha assuming that CAPM is the correct asset pricing model? Is BP stock fairly priced, underpriced, or overpriced? Please explain your answer
A security act as an insurance against market crashes. It pays $1 if the stock market drops 10% or more next year and $0 otherwise. Risk free rate is zero. Guess the sign of the expected return (according to CAPM) a) postive b) close to zero c) negative
Although investing all at once works best when stock prices are rising, dollar-cost averaging can be a good way to take advantage of a fluctuating market. Dollar-cost averaging is an investment strategy designed to reduce volatility in which securities are purchased in fixed dollar amounts at regular intervals regardless of what direction the market is moving. This strategy is also called the constant dollar plan. You are considering a hypothetical $1,200 investment in a media company's stock. Your choice is to invest the money all at once or dollar-cost average at the rate of $100 per month for one year. Assume that the company allows you to purchase "fractional" shares of its stock. (a) If you invested all of the money in January and bought the shares for $12 each, how many shares could you buy? shares (b) From the following chart of share prices, calculate the number of shares that would be purchased each month using dollar-cost averaging and the total shares for the year. Round to…
Although investing all at once works best when stock prices are rising, dollar-cost averaging can be a good way to take advantage of a fluctuating market. Dollar-cost averaging is an investment strategy designed to reduce volatility in which securities are purchased in fixed dollar amounts at regular intervals regardless of what direction the market is moving. This strategy is also called the constant dollar plan. You are considering a hypothetical $1,200 investment in a media company's stock. Your choice is to invest the money all at once or dollar-cost average at the rate of $100 per month for one year. Assume that the company allows you to purchase "fractional" shares of its stock. (a) If you invested all of the money in January and bought the shares for $12 each, how many shares could you buy? shares (b)From the following chart of share prices, calculate the number of shares that would be purchased each month using dollar-cost averaging and the total shares for the year.…
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Use the following forecasted financials: (Certain cells were left intentionally blank by asker) You may need to use the CAPM model. Assume beta equals 1.09, the risk-free rate is 1.62%, and the market risk premium is 4.72%. d) Calculate the terminal value and the present value of the terminal value. Assume a long-term growth rate of 3%. e) Calculate Sherwin Williams value per share. The company has 263.3 million shares outstanding.

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