Now suppose the stock price of Kaplin Incorporated throughout the four quarters in 2019 actually looks as follows:1009080706050403020100o st.1Kaplin Incorporated Stock Price (2019)235(?Suppose you purchased 3,500 shares at the beginning of January (the beginning of Quarter 1) at the market price. If you decide that you made amistake purchasing the stock and sell all of your shares once the price drops to $30, your profit will beSuppose you purchased an American-style put option for $4 per share with an exercise price of $35 that expires at the end of March. Given the strikeprice, and stock prices throughout the quarter, you▼ exercise the put option because it is▼. As a result, yourprofit will be $(Hint: If you exercise the put option, assume you immediately purchase shares, at the lowest price in Quarter 1, thatcan then be resold using the put option.)Given each of your answers in this problem, and that investors are perfect call makers, what conclusion can be made? Check all that apply.When an investor thinks the price of a stock will decrease, purchasing put options will result in a lower profit (or greater loss) thanpurchasing the stock.When an investor thinks the price of a stock will increase, purchasing put options will result in a higher profit (or lower loss) thanpurchasing the stock.When an investor thinks the price of a stock will increase, purchasing put options will result in a lower profit (or greater loss) thanpurchasing the stock.When an investor thinks the price of a stock will decrease, purchasing put options will result in a higher profit (or lower loss) thanpurchasing the stock.

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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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Rebecca is interested in purchasing a European call on a hot new stock, Up. Inc. The call has a strike price of $98.00 and expires in 95 days. The current price of Up stock is $117.67, and the stock has a standard deviation of 41% per year. The risk-free interest rate is 6.88% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note: Make sure to round all intermediate calculations to at least five decimal places.)
A stock's current price is $20 and a 3-month call with a strike price of $22 sells for $2. You have $4,000 to invest and are comparing two alternate strategies: 1) Buy 200 shares of the stock; 2) Buy 2,000 call options on the stock. Which of the following is correct? The two strategies are equally profitable when the stock price is $26.00 O b. The two strategies are equally profitable when the stock price is $22.00 О с. The option strategy is more profitable when the stock price is $26.00 LO
16. Imagine that you are holding 6,400 shares of stock, currently selling at $40 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $45 are selling at $6, and January puts with a strike price of $35 are selling at $8. a. What will be the value of your portfolio on the January expiration date if the stock price ends up at $29? b. What will be the value of your portfolio on the January expiration date if the stock price is $49?
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $98.00 and expires in 95 days. The current price of Up stock is $115.36, and the stock has a standard deviation of 37% per year. The risk-free interest rate is 6.29% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note: Make sure to round all intermediate calculations to at least five decimal places.)
A manager buys three shares of stock today, and then sells one of those shares each year for the next 3 years. His actions and the price history of the stock are summarized below. The stock pays no dividends. Time Price Action 0 $ 150 Buy 3 shares 1 180 Sell 1 share 2 180 Sell 1 share 3 180 Sell 1 share Required: a. Calculate the time-weighted geometric average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Calculate the time-weighted arithmetic average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. Calculate the dollar-weighted average return on this portfolio. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Assume we are in July, 2023. In July of 2023, the share prices of company B are $80 per share. You believe they should be $30 per share, and are thus overvalued. December 2023 put options on a strike price of $60 per share are currently valued at $5. Each put contract is based on 100 shares. a.) What is your net dollar profit or loss as a holder of the put contract (based ona contract size of 100 shares) if we arrive at expiry in December and you are wrong and Company B shares are selling for $100?
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.
Assume we are in July, 2023. In July of 2023, the share prices of company B are $80 per share. You believe they should be $30 per share, and are thus overvalued. December 2023 put options on a strike price of $60 per share are currently valued at $5. Each put contract is based on 100 shares. a.) What is your net dollar profit or loss as a holder of the put contract (based ona contract size of 100 shares) if we arrive at expiry in December and you are wrong and Company B shares are selling for $100? (Show your working in full)
On July 1, an investor holds 50000 shares of a certain stock. The market price is $50 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index is currently 1500 and one contract is for delivery of $50 times the index. The beta of the stock is 1.5. What strategy should the investor follow? Under what circumstances will it be profitable?
The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, but you are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will go up or down, however. The current price of the stock is $125 per share, and the price of a 6 month call option at an exercise price of $125 is $6.93. Required: If the semiannual risk-free interest rate is 5%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $125? (The stock pays no dividends.) What would be a simple options strategy to exploit your conviction about the stock price's future movements? How far would it have to move in either direction for you to make a profit on your initial investment?
Suppose you have $28,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You notice that a put option with a $40 strike is available with a premium of $2.80. Calculate your percentage return on the put option for the six-month holding period if the stock price declines to $36 per share. (Do not round intermediate calculations. Enter your 6-month return as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Percentage return %
One share of Napier Inc. is currently trading at $84 per share. In one year, the price is expected either (1) rise to $105 or (2) fall to $60. You are interested in purchasing a call option on Napier, Inc. The option has a strike price of $92 and expires in 1 year. The current risk-free rate for the year is 4%. Based on binomial options pricing (as shown in class), what is a fair price for this option? Answer to the nearest cent, with no punctuation. That is, $5.289 should be entered at 5.29.

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