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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Lett Incorporated’s stock price is now $50, but it is expected eitherto rise by a factor of 1.5 or to fall by a factor of 0.7 by the end ofthe year. There is a call option on Lett’s stock with a strike price of$55 and an expiration date 1 year from now. What are the stock’spossible prices at the end of the year? ($75 or $35) What is thecall option’s payoff if the stock price goes up? ($20) If the stockprice goes down? ($0) If we sell 1 call option, how many sharesof Lett’s stock must we buy to create a riskless hedged portfolioconsisting of the option position and the stock? (0.5) What is thepayoff of this portfolio? ($17.50) If the annual risk-free rate is 6%,then how much is the riskless portfolio worth today (assumingdaily compounding)? ($16.48) What is the current value of the calloption? ($8.52)
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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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Suppose you had just gone long (purchased) on lot of Syarikat XYZ stock at a price of RM 15.00 each, for a total investment of RM 15,000. You believe this stock has long term potential but wish to protect yourself from any short-term downside movement in price. Suppose 3-month, at-the-money put options on Syarikat XYZ stocks are being quoted at RM 0.15 or 15 sen each or RM 150 per lot (RM 0.15 x 1,000). a. What would be the appropriate options strategy to hedge the long stock position? b. Show (in a table) the payoff to the combined position for a given range of stocks prices at options maturity in 3-months. c. Draw the payoff profile of combined positions.
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Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stock's current price, SO, is $50, and a call option expiring in one year has an exercise price, X, of $50 and is selling at a price, C, of $9. With $18, 900 to invest, you are considering three alternatives. a. Invest all $18, 900 in the stock, buying 378 shares. b. Invest all $18,900 in 2, 100 options (21 contracts). c. Buy 100 options (one contract) for $900, and invest the remaining $18,000 in a money market fund paying 6% in interest over 6 months (12% per year). What is your rate of return for each alternative for the following four stock prices in 6 months? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills + 100 options)" answers to 2 decimal places.) The total value of your portfolio in six months for each of the following stock prices is: The percentage…
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The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month. a. What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer. b. Draw a binomial tree diagram for this American call option, showing the share price, call price, and whether the call should be exercised at each state during the next two months. ***Answer b only

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