The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 26% or it falls by 19.3%. Its price now is $43. The interest rate is 0.5% per month. a. What is the value of a one-month call option with an exercise price of $43? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $42? e. What is the option delta of the two-month call over the first one-month period?
The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 26% or it falls by 19.3%. Its price now is $43. The interest rate is 0.5% per month. a. What is the value of a one-month call option with an exercise price of $43? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $42? e. What is the option delta of the two-month call over the first one-month period?
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 stock price of Heavy Metal (HM) changes only once a month: either it goes up by 26% or it falls by 19.3%. Its price now is $43. The
interest rate is 0.5% per month.
a. What is the value of a one-month call option with an exercise price of $43?
b. What is the option delta?
c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock
and what amount must be borrowed?
d. What is the value of a two-month call option with an exercise price of $42?
e. What is the option delta of the two-month call over the first one-month period?
Complete this question by entering your answers in the tabs below.
Req A and B
Req C
Req D and E
d. What is the value of a two-month call option with an exercise price of $42? (Do not round intermediate calculations. Round
your answer to 1 decimal place.)
e. What is the option delta of the two-month call over the first one-month period? (Do not round intermediate calculations.
Round your answer to 3 decimal places.)
Show less A
d. Option price
e. Delta
< Req C
Req D and E >
Expert Solution
Given
| Particulars | Amount | ||
| Stock price | 43 | Increase % | 26% |
| Interest rate | 0.50% | Decrease % | 19.30% |
| Exercise price | 43 |
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