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 $120 per share, and the price of a 6 month call option at an exercise price of $120 is $8.89. Required: a. If the semiannual risk-free interest rate is 4%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $120? (The stock pays no dividends.) b. 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? Complete this question by entering your answers in the tabs below. Required A Required B 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? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Strategy Price change for profit
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 $120 per share, and the price of a 6 month call option at an exercise price of $120 is $8.89. Required: a. If the semiannual risk-free interest rate is 4%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $120? (The stock pays no dividends.) b. 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? Complete this question by entering your answers in the tabs below. Required A Required B 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? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Strategy Price change for 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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Transcribed Image Text: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 $120 per share, and the price of a 6 month call option at an exercise price of $120 is $8.89.
Required:
a. If the semiannual risk-free interest rate is 4%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of
$120? (The stock pays no dividends.)
b. 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?
Complete this question by entering your answers in the tabs below.
Required A
Required B
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?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Strategy
Price change for profit
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