Question 4: 18 marksA company decides to award stock options to its CEO at a time whenthe stock price is $40 per share. The call options will have a 1-yearexpiry and have an exercise price of $20 per share. The standarddeviation of stock returns is 30% and the risk-free rate is 0.5% p.a.In preparing its accounts, however, the company pretends that thestock price at the time of issuing these call options was $20.Consideringinformation, answer the following questions:thisi) What is the actual value of one stock option awarded to theCEO?ii)(9 marks)What is the declared value of one stock option awarded to theCEO?(3 marks)iii) Why is this situation scandalous? Discuss briefly (50-100words)(6 marks)Note: Cumulative normal distribution table is available atAppendix 1

To value the stock options awarded to the CEO, we can use the Black-Scholes option pricing formula,…

Answered: Question 4: 18 marks A company decides…

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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A company decides to award stock options to its CEO at a time when the stock price is $40 per share. The call options will have a 1-year expiry and have an exercise price of $20 per share. The standard deviation of stock returns is 30% and the risk-free rate is 0.5% p.a. In preparing its accounts, however, the company pretends that the stock price at the time of issuing these call options was $20. Considering this information, answer the following questions:i) What is the actual value of one stock option awarded to the CEO?ii) What is the declared value of one stock option awarded to the CEO?iii) Why is this situation scandalous? Discuss briefly
A company decides to award stock options to its CEO at a time when the stock price is $40 per share. The call options will have a 1-year expiry and have an exercise price of $20 per share. The standard deviation of stock returns is 30% and the risk-free rate is 0.5% p.a. In preparing its accounts, however, the company pretends that the stock price at the time of issuing these call options was $20. Considering this information, answer the following questions:i) What is the actual value of one stock option awarded to the CEO?ii) What is the declared value of one stock option awarded to the CEO?iii) Why is this situation scandalous? Discuss briefly (50-100 words
A company decides to award stock options to its CEO at a time when the stock price is $40 per share. The call options will have a 1-year expiry and have an exercise price of $20 per share. The standard deviation of stock returns is 30% and the risk-free rate is 0.5% p.a. In preparing its accounts, however, the company pretends that the stock price at the time of issuing these call options was $20. Considering this information, answer the following questions: What is the actual value of one stock option awarded to the CEO? What is the declared value of one stock option awarded to the CEO?
Question A .The price of an American call on a non-dividend-paying stock is $4. The stock price is $31, the strike price is $30, and the expiration date is in 3 months. The risk-free interest rate is 8%. The upper and lower bounds for the price of an American put on the same stock with the same strike price and expiration date is $3.00 and $2.41, respectively. Explain carefully the arbitrage opportunities if the American put price is greater than the calculated upper bound. Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line
solve a,b,c and d please
4. JP Morgan's current stock price is $104.50. You purchase 7 December $110 call options on JP Morgan. The call premium (i.e., call price) on these options is $4.55. If JP Morgan's stock price at expiration is $118.25, what is your dollar profit or loss on this investment at expiration?
8. Buy one July 170 put contract. Hold it until the option expires. Determine the profits and display the results in a chart (include profits for the following underlying stock prices: 130,140,150,160,170,180,190). Identify the breakeven stock price at expiration. What is the maximum possible gain and loss on the transaction?
Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months.a. What will be the profit to an investor who buys the call for $4.8 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place.) stock price profit i. $40 ii. $45 iii. $50 iv. $55 v. $60 b. What will be the profit to an investor who buys the put for $7.5 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place.) stock price profit i. $40 ii. $45 iii. $50 iv. $55 v. $60
Both a call and a put currently are traded on stock XYZ; both have strike prices of $60 and expirations of 6 months.a. What will be the profit to an investor who buys the call for $5 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. b. What will be the profit to an investor who buys the put for $7 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $240 at year-end. XYZ currently sells for $240. Over the next year, the stock price will either increase by 7% or decrease by 7%. The T-bill rate is 3%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $210 at year-end. XYZ currently sells for $210. Over the next year, the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio?
k nces The common shares of Twitter, Incorporated (TWTR) recently traded on the NYSE for $83 per share. You have employee stock options to purchase 1,000 TWTR shares for $88 per share. The options expire in three years. Assume that the annualized volatility of TWTR stock is 73 percent and that the interest rate is 3.4 percent. (Assume the options are European options that may only be exercised at the maturity date.) a. Is this option a call or a put? Call O Put b. Using an option pricing calculator such as the one at erieri.com/blackscholes, estimate the value of your TWTR options. Note: Round your intermediate calculations to 2 decimal places and final answer to nearest whole dollar. Value of your TWTR options $ 83,000 c. What is the estimated value of the options if their maturity is six months instead of three years? Note: Round your intermediate calculations to 2 decimal places and final answer to nearest whole dollar. Value of the options d. What is the estimated value of the…

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