What is the risk-neutral valuation of a six-month Euro- pean put option to sell a security for a price of 100 when the current price is 105, the interest rate is 10%, and the volatility of the security is .30?

What is the risk-neutral valuation of a six-month Euro- pean put option to sell a security for a price of 100 when the current price is 105, the interest rate is 10%, and the volatility of the security is .30?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 56QA

See similar textbooks

Related questions

Q: A stock price is currently £10. It is known that at the end of the month l be either £15 or £9. We…

A: Stock Price £ 10 Risk-Free Rate 0% Strike £13 Up £15 Down £9

Q: The risk-fee rate is 5% per period and a (non- income paying) security has a current price of £300.…

A: A type of derivative in the financial market that provides its holder, the right to sell the…

Q: A put option with an exercise price of $65 will expire in 180 days. The underlying asset price of…

A: Put option is a special kind of derivative contracts , which gives a right to sell to the contract…

Q: Consider a security with a duration of 8 years. The current interest rate level is 6% p.a. How does…

A: Duration = 8 yearsInterest rate (r) = 0.06Modified duration = ?Modified duration means the…

Q: Based on the pure expectations theory, is the following statement true or false? A certificate of…

A: Since more than three sub-parts are posted at a time. The answer for first three sub-parts is only…

Q: 1. Suppose that, in each period, the cost of a security either goes up by a factor of u = 2 or down…

A: Variables in the question:u=2d=1/2S0=$100Strike price=$90Option: European call option

Q: What is the risk-neutral valuation of a six-month European put option to sell a security for a price…

A: We will straight way use the Black Schole Model to value the put option.Inputs are:Current stock…

Q: Suppose a European call option on a sack of corn with a strike price of $50 and a maturity of…

A: Strike price (X) = $50 Spot price (S) = $53 Call price (C) = $5 Put price = P r = 2% t = 1 month =…

Q: Determine the risk-neutral value of a eight-month European put option to sell a FLB (First Local…

A: We have to price the put option. We will use the Black Scholes Option pricing model. It's a fairly…

Q: Consider a European Call Option with a strike of 82. The current price of the underlying asset is…

A: Here, Strike Price is $82 Current Price is $80 Time To Expiry is 5 months Value of Call Option is…

Q: Consider a 6-month futures contract on a financial asset with dividend yield q=3.96% per year. Risk…

A: Under future contracts, the parties re required to buy/sell the asset at the predetermined price. It…

Q: Suppose the September Eurodollar futures contract has a price of 96.4. You plan to borrow $50m for 3…

A: As per the Q&A guidelines, if multiple subparts are asked at once then the answer for the first…

Q: Assume that the price of a forward contract is 127.87. The European options on the forward contract…

A: Shares are the securities issued by the companies to arrange the funds. Prices of the shares…

Q: Determine the risk-neutral value for a European put option (for a FLB (First Local Bank) share) that…

A: Given: Strike price = R500 Current price = R650 Interest rate = 11% Volatility = 0.026 Period = 8…

Q: The stock price 6 months from the expiration of an option is $42, the exercise price of the option…

A: ParticularsVariableValueCurrent priceS $ 42.00Exercise priceX $ 40.00Risk free rater10%Time period…

Q: Which of the following statements is (are) TRUE? Select one or more alternatives: If the AUD trades…

A: The forward contract is a contract which customise contract between two at future date to purchasing…

Q: Suppose you work as a broker in an investment company, and there is an expectation that the market…

A: Market price of CD is calculated by discounting the maturity value to present date with the market…

Q: What is the appropriate risk-free rate on May 11, 2022 for an option that expires on Oct 20, 2022 if…

A: Bid Rate = 3.65Ask Rate = 3.65Start Date = 11/05/2022End Date = 20/10/2022

Q: Assume that the spot price of an underlying asset is Php250 and suppose the 10% is the annual…

A: Forward price is the future value of an underlying asset. spot price is the current price of that…

Q: Assume the spot Swiss franc is $0.7030 and the six-month forward rate is $0.7010. What is the Value…

A: Here, Spot Price is $0.7030 Six Month Forward rate is $0.7010 Strike Price is $0.6830 Risk Free Rate…

Q: Determine the risk-neutral value of a eight-month European put option to sell a FLB (First Local…

A: Risk neutral valuation: The risk-neutral valuation method assumes that the prices of all assets will…

Q: What is the price of a five year zero-coupon, default free security with a face value of $1000.

A: Approach to solving the question: For better clarity of the solution, I have attached the Excel…

Q: The market price of a security can be modelled by assuming that it will either increase by 25% or…

A: European Put Option: A financial derivative that gives the holder the right, but not the obligation,…

Q: Q.3 Determine the risk-neutral value for a European put option (for a FLB (First Local Bank) share)…

A: Information Provided: Strike price = 500 Current price = 650 Interest rate = 11% Volatility = 0.026…

Q: Suppose we are pricing a five-year Libor-based interest rate swap with annual resets (30/360 day…

A: The fixed rate of the swap can be calculated by deducting the present value of final year (Z N) and…

Q: A put option with an exercise price of $56 will expire in 180 days. The underlying asset price of…

A: Characteristics of a put option have been provided. The lower bound for the put option is to be…

Q: Suppose we wish to borrow $10 million for 3 months, and that the quoted Eurodollar futures price is…

A: LIBOR rate refers to the interest rate which is considered by banks at a global level for lending…

Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

What is the risk-neutral valuation of a six-month Euro-
pean put option to sell a security for a price of 100 when the current price
is 105, the interest rate is 10%, and the volatility of the security is .30?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What is the risk-neutral valuation of a six-month European put option to sell a security for a price of 100 when the current price is 105, the interest rate is 10%, and the volatility of the security is .30?
Consider a 6-month futures contract on a financial asset with dividend yield q=3.96% per year. Risk free rate is 10% per year. Current value of an asset is S0=$25. What should be the 6-month futures price on this asset, if there is no convenience yield and storage costs?
D3)
Suppose that the current rates on 60 and 120 day GICs are 5.50% and 5.75%, respectively. An investor is weighing the alternatives of purchasing a 120 day GIC versus purchasing a 60 day GIC and then reinvesting its maturity value in a second 60 day GIC.What would the interest rate on 60 day GICs have to be 60 days from now for the investor to end up in the same financial position with either alternative?
Suppose the September Eurodollar futures contract has a price of 96.4. You plan to borrow $50m for 3 months in September at LIBOR, and you intend to use the Eurodollar contract to hedge your borrowing rate. a. What rate can you secure? b. Will you be long or short the Eurodollar contract? c. How many contracts will you enter into? d. Assuming the true 3-month LIBOR is 1% in September, what is the settlement in dollars at expiration of the futures contract? (For purposes of this question, ignore daily marking-to-market on the futures contract.)
The market price of a security can be modelled by assuming that it will either increase by 25% or decrease by 15% each month, independently of price movement in other months. No dividends are payable in the next two months. The continuously compounded monthly risk-free rate of interest is 1%. The current market price of the security is 127. a.) Use the binomial model to calculate the value of a two-month European put option on the security with strike price of 125. b.) Calculate the value of a two-months American put option on the same security with the same strike price. c.) Calculate the value of a two-months American call option on the same security with the same strike price.
Suppose you work as a broker in an investment company, and there is an expectation that the market interest rate will be 0.031. based on this expectation you are required to calculate the market price for the following CD; Issue date: 1 January 2021 Maturity date:10 May 2021. The face value OMR 10000. Interest on CD: 5 percent.
The risk-fee rate is 5% per period and a (non- income paying) security has a current price of £300. In one period the price will either rise to £360 or fall to £240. A one-period European put option exists with a strike price of £325. A second one-period European put option exists with a strike price of £315. Which put would you expect to have the greater price. Select one: a. Their prices should be equal b. The £315 put c. We do not have enough information to tell d. The £325 put
Suppose we wish to borrow $10 million for 3 months, and that the quoted Eurodollar futures price is 94.80. If the interest rate on the loan is based on the 3-month LIBOR rate, what will we pay to repay the loan (that is, the total amount we need to repay including principal and interest based on LIBOR)? Question 16 options: $10, 160, 000.00 $10, 130,000.00 $10, 115,000.00 $10, 640,000.00 $10,520,000.00
Which of the following statements is (are) TRUE? Select one or more alternatives: If the AUD trades at a forward premium relative to the NZD, we would expect the NZD risk-free rate to be higher than the AUD risk-free rate. If the 1-year AUD risk-free rate is higher than the 1-year NZD risk-free rate then the value of the NZD will rise relative to the AUD over the next year. Assuming it doesn't hedge, a New Zealand based company importing Australian products will suffer if the value of the AUD rises relative to the NZD. □ If covered interest rate parity holds, then uncovered interest rate parity must also hold.
Suppose we are pricing a five-year Libor-based interest rate swap with annual resets (30/360 day count). The estimated present value factors are given below: Maturity(years) Present ValueFactors1 0.9900992 0.9778763 0.9651364 0.9515295 0.937467 What is the fixed rate of the swap? Answer in 4 decimal places
Suppose that, in each period, the cost of a security either goes up by a factor of 2 or goes down by a factor of 1/2 (i.e. u=2, d=1/2). If the initial price of the security is 100, determine the no-arbitrage cost of a call option to purchase the security at the end of two periods for a price of 150.