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question is related to FINANCIAL RISK MANAGEMENT

question is related to FINANCIAL RISK MANAGEMENT

Essentials Of Investments
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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question is related to FINANCIAL RISK MANAGEMENT

Suppose a stock currently trades at a price of $158. The stock price can go up 33 per- cent or down 15 percent. The risk-free rate is 4.5 percent. A. Use a one-period binomial model to calculate the price of a put option with exercise price of $158. B. Suppose the put price is currently $14. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options. C. Suppose the put price is currently $1 1. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.
Transcribed Image Text:Suppose a stock currently trades at a price of $158. The stock price can go up 33 per- cent or down 15 percent. The risk-free rate is 4.5 percent. A. Use a one-period binomial model to calculate the price of a put option with exercise price of $158. B. Suppose the put price is currently $14. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options. C. Suppose the put price is currently $1 1. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.
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