Question 1: ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: Strike price Call Price (calculated with 40% Vol) Call Price Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 20.77 19.80 20.68 (calculated with 10% Vol) 24 26 6.519 4.358 6.943 5.224 28 2.341 0.867 0.195 3.765 30 32 34 36 2.598 1.716 0.025 0.002 1.087 0.661 22.67 24.6

Question 1: ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: Strike price Call Price (calculated with 40% Vol) Call Price Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 20.77 19.80 20.68 (calculated with 10% Vol) 24 26 6.519 4.358 6.943 5.224 28 2.341 0.867 0.195 3.765 30 32 34 36 2.598 1.716 0.025 0.002 1.087 0.661 22.67 24.6

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

See similar textbooks

Similar questions

Use the random walk model to forecast the closing price of this stock on the next trading day. Round your answer to the nearest cent, if necessary. $____ You can be about 95% certain that the forecast made in part a will be off by no more than how many dollars? Round your answers to the nearest cent, if necessary. Forecast Lower limit $ Upper limit $ Date Adjusted Close 4-Jan-18 100.47 5-Jan-18 100.70 8-Jan-18 99.78 9-Jan-18 100.14 10-Jan-18 100.84 11-Jan-18 100.35 12-Jan-18 100.59 16-Jan-18 99.97 17-Jan-18 100.38 18-Jan-18 99.49 19-Jan-18 97.66 22-Jan-18 97.95 23-Jan-18 97.61 24-Jan-18 98.93 25-Jan-18 99.32 26-Jan-18 99.26 29-Jan-18 99.04 30-Jan-18 98.34 31-Jan-18 99.03 1-Feb-18 99.63 2-Feb-18 96.32 5-Feb-18 91.67 6-Feb-18 93.83 7-Feb-18 93.26 8-Feb-18 88.01 9-Feb-18 91.38 12-Feb-18 94.35 13-Feb-18 94.21 14-Feb-18 95.87 15-Feb-18 96.20 16-Feb-18 96.43 20-Feb-18 96.83 21-Feb-18 97.14 22-Feb-18…
Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10 percent nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70. Show that it is possible to replicate the stock payoff by borrowing and buying a call option.
Suppose that on 27 October 2022, Wall Street Journal in New York presents the following price for 27 March 2023 call options on Microsoft stock (in $ USA) strike 75 80 85 price 11 7.96 5.5 while the annual interest rate is 4% per year. On this date (27 October 2022) the Microsoft stock was trading at $81.625. Suppose we decide that the volatility of the market is 30%. Should you buy the call option as the European one with strike price $80? Justify your answer.
Your broker has developed a list of firms, their betas, and the return he expects the stock to yield over the next twelve months (labeled "Expected Return"). You have estimated that the risk-free rate is 5% and the return to the market will be 12%. Assuming that CAPM is correct, which stock should you purchase? Expected Return 10.5% Delta Vanlines 1.25 13.0 % 1.60 16.0% Firm Beta Anderson, Inc. 0.90 Nathan's Bakeries Z-man Electronics O Delta Vanlines 1.90 19.0% All of the stocks, Anderson, Inc. O Nathan's Bakeries OZ-man Electronics
A collar is established by buying a share of stock for $54, buying a 6-month put option with exercise price $47, and writing a 6-month call option with exercise price $61. On the basis of the volatility of the stock, you calculate that for a strike price of $47 and expiration of 6 months, N(d1) = 0.7298, whereas for the exercise price of $61, N(d1) = 0.6374. Required: What will be the gain or loss on the collar if the stock price increases by $1? What happens to the delta of the portfolio if the stock price becomes very large? What happens to the delta of the portfolio if the stock price becomes very small?
Suppose you think WW stock is going to appreciate substantially in value over the next six months. The stock's current price is $30 and the call option expiring in six months has an exercise price, X, of $35 and is selling at a premium (option price), C, of $12. You invest $12,000 on 1,000 options (10 contracts, each for 100 shares). What is the rate of return if the stock price six months from now is $50? Show your work.
A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 5.2 percent, and the risk - free rate is 5.2 percent. What is the value of a call option on the stock with a strike price of $60 and 48 days to expiration? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Call option $
Which of the following call options on XYZ stock is most valuable? 1. Strike price = $ 40, 3 months to expiration 2. Strike price = $ 40, 3 months to expiration 3. Strike price = $ 50, 6 months to expiration 4. Strike price = $ 50, 6 months to expiration
A stock is currently priced at $61 and has an annual standard deviation of 41 percent. The dividend yield of the stock is 2.8 percent, and the risk-free rate is 4.8 percent. What is the value of a call option on the stock with a strike price of $58 and 52 days to expiration? (Round your answer to 2 decimal places. Omit the "$" sign in your response.) Call option $
One month ago you purchased a put option on the S&P500 Index with an exercise price of $900.00. Today is the expiration date, and the index is at $896.46. a. Will you exercise the option? b. What will be your profit?
(a) The table below gives information about European options with a maturity date of 6 months. Type Of option Strike Price Call 65 Call 58 Put 65 Premium 5 8 4 (i) Devise the payoff profile of the hedging strategy from the above for an investor betting on an increase in the stock price and calculate the payoff if the stock price increases to $66 after 6 months. (8 marks) (ii) Suppose that another investor expects a big stock price movement but is not sure of the direction. She however bets that the downward movement is more likely. Devise the corresponding trading strategy and calculate the payoff if the stock price is $55 after 6 months. (8 marks) (b) By analysing the pay off profiles of a protective put strategy and a straddle, discuss in what ways these strategies shield the investor from potential losses.
A stock is currently selling for $39. In one period, the stock will move up by a factor of 1.29 or down by a factor of .53. A call option with a strike price of $50 is available. If the risk-free rate of interest is 2.5 percent for this period, what is the value of the call option?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS