Stock index Y is currently priced at $25/unit. The index pays dividends continuously at a rate proportional to its price at a constant rate of 3%. An investor purchases 200 units of the stock index and invests all dividends in the index. The continuously compounded risk-free interest rate is 5%. After four months the investor closes out all positions when the index is priced at $25.90. Calculate the four-month profit.

Stock index Y is currently priced at $25/unit. The index pays dividends continuously at a rate proportional to its price at a constant rate of 3%. An investor purchases 200 units of the stock index and invests all dividends in the index. The continuously compounded risk-free interest rate is 5%. After four months the investor closes out all positions when the index is priced at $25.90. Calculate the four-month profit.

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 stock trading at $47 has a volatility of 30 percent. The continuously compounded risk-free rate is 6 percent. A dividend of $1.4 is expected in 4 months, and no other dividends are expected during the next 12 months. Price a European call written on this stock with an exercise price of $50 and a time to maturity of one year.
The S&R index spot price is 1100 and the continuously compounded interest rate is 5%. You observed a 9-month forward price of 1129.257. (a) What is the implied dividend yield? (b) Suppose you believe the dividend yield will be 3% over the next 9 months. How can you arbitrage?
The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $105 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $105 is $12.86. a. If the risk-free interest rate is 5% per year, what must be the price of a 3-month call option on C.A.L.L. stock at an exercise price of $105 if it is at the money? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price of a 3-month call option
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am. 66.
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Suppose you can borrow and lend at the annual interest rate of 6% per annum. The IBM stock is trading at $200. It is not going to pay any dividend in one year. Use this information to answer the following three questions. 20. What is the fair forward price of a forward contract which calls for the delivery of 1 share of IBM stock at the end of one year? A. $216 B. $210 C. $214 D. $212 21. If the actual forward price Fa is $214, your arbitrage strategy is to A. buy one share of IBM, borrow $200, and sell the forward B. buy one share of IBM, borrow $212, and buy the forward C. short one share of IBM, lend $200, and buy the forward D. short one share of IBM, borrow $200, and sell the forward 22. At the end of one year, suppose IBM stock price is St, then the cash flow in the spot (stock) market is _, the cash flow in the forward contract is and the arbitrage profit is A. ST, 214- ST, 2 B. -St, ST-214, 2 C. -ST, 214-ST, 2 D. ST, ST-214, 2
The stock price of Heavy Machine (HM) changes only once a month: Either it goes up by 20% or it falls by 16.7%. Its price now is $50. The interest rate is 1% per month. What is the value of a one-month call option with an exercise price of $45?Round to 2 decimal points for each step of the calculation. A. $ 7.20B. $ 7.13C. $ 7.72D. $ 7.80
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