Suppose a stock price can go up by 15.25% or down by 13.25% over the next year. You own a one-year put on the stock. The interest rate is 11%, and the current stock price is $61. a. What exercise price leaves you indifferent between holding the put or exercising it now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even exercise price 2$ 0.85 p. How does this break-even exercise price change if the interest rate is increased? If the interest rate is increased, the value of the put option decreases

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
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Suppose a stock price can go up by 15.25% or down by 13.25% over the next year. You own a one-year put on the stock. The interest
rate is 11%, and the current stock price is $61.
a. What exercise price leaves you indifferent between holding the put or exercising it now? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Break-even exercise price
0.85
b. How does this break-even exercise price change if the interest rate is increased?
If the interest rate is increased, the value of the put option
decreases
%24
Transcribed Image Text:Suppose a stock price can go up by 15.25% or down by 13.25% over the next year. You own a one-year put on the stock. The interest rate is 11%, and the current stock price is $61. a. What exercise price leaves you indifferent between holding the put or exercising it now? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even exercise price 0.85 b. How does this break-even exercise price change if the interest rate is increased? If the interest rate is increased, the value of the put option decreases %24
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