The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, butyou are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will goup or down, however. The current price of the stock is $125 per share, and the price of a 6 month call option at anexercise 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? Howfar would it have to move in either direction for you to make a profit on your initial investment?

Given:- Current stock price (S) = $125- Exercise price (X) = $125- Call option price (C) = $6.93-…

Answered: The common stock of the P.U.T.T.…

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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Finance
The stocks of Cee Mobile Limited is currently trading at $73 each. The call option on the company's stock has an exercise price of $70, with fifty (50) days remaining to expiration. It is assumed that the yield on treasury bills is currently 2%, while the volatility of the stock price is estimated as being 35%. Required: i. Using the Black-Scholes-Merton (BSM) model, calculate the value of the Call option, given the above parameters. Show all relevant workings. ii. Of the value computed, how much is the intrinsic value and the time value of the Call option? iii. Using the BSM model and the information given above, calculate the value of the Put option on the stock, with a similar strike price and days to expiration.
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