Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 15, Problem 26C
Joe Finance has just purchased a stock-index fund, currently selling at
a. Analyze Joe’s; and Sally’s strategies by drawing the profit diagrams for the stock-plus-put positions for various values of the Stock fund in three months.
b. When does Sally’s strategy do better? When does it do worse?
c. Which strategy entails greater systematic risk?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Sam wants to trade options and is looking at some on Honeywell's stock. Specifically, he sees a European call on
Honeywell with a strike price of $100.00 that expires in 87 days. Honeywell's current stock price is $121.43, and it has
a standard deviation of 42% per year. The risk-free interest rate is 6.03% per year. They pay no dividends. However, he
is interested in buying a put not a call. Estimate the value of a put with the same strike price and expiration date as the
call just described. Use a 365-day year. (You must show me how you do this without an Excel-based option pricing
model. That is, you must show your work with the formulas and Z-Tables. The value will likely be different than if you
just plug into an Excel-based BSOPM).
The price of the put is $
(Round to two decimal places.)
A pension fund currently has $50 million in the S&P 500 index and $50
million in Treasury bills (risk-free asset). The current 6-month S&P 500
futures price is 1390.5, and one contract is on $250 times the index.
a) Suppose that the manager is concerned about the performance of
the index over the next 6 months. Explain what position in the S&P
500 futures he should take to eliminate all exposure to the market
over the next six months.
b) If the manager decides to switch to a portfolio that invests 30% in
the index and 70% in T-bills for a period of 6 months, explain how
he could achieve that using S&P 500 futures.
daha Itd has a short term investment worth $100 000 which is traded on the stock exchange. the investment will be sold in 90 days, the daily standard deviation of movements in the value of the investmentis $1000. based on general market conditions the most likely outcome is that the investment can be sold for $96 500. with 90% confidence what is the lowest value that daha Itd will be able to sell the investment?
Chapter 15 Solutions
Essentials Of Investments
Ch. 15.2 - Plot the rate of return to the call-plus-bills...Ch. 15.2 - Prob. 2EQCh. 15 - Prob. 1PSCh. 15 - Prob. 2PSCh. 15 - Prob. 3PSCh. 15 - Prob. 4PSCh. 15 - Prob. 5PSCh. 15 - Prob. 6PSCh. 15 - Prob. 7PSCh. 15 - The following diagram shows the value of a put...
Ch. 15 - You are a portfolio manager who uses Options...Ch. 15 - An investor purchases a stock for 38 and a put for...Ch. 15 - ll. Imagine that you are holding shares of stock,...Ch. 15 - Prob. 12PSCh. 15 - The common stock of the R.U.I.T. Corporation has...Ch. 15 - 14. The common stock of the C.A.L.L. Corporation...Ch. 15 - Prob. 15PSCh. 15 - Prob. 16PSCh. 15 - Prob. 17PSCh. 15 - Prob. 18PSCh. 15 - Prob. 19PSCh. 15 - In what ways is owning a corporate bond similar to...Ch. 15 - Prob. 21PSCh. 15 - Consider the following options portfolio: You...Ch. 15 - Consider the following portfolio. You write a put...Ch. 15 - A put option with strike price 300 on the Acme...Ch. 15 - You buy a share of stock, mite a one-year call...Ch. 15 - Joe Finance has just purchased a stock-index fund,...Ch. 15 - You write a call option with X=50 and buy a call...Ch. 15 - Devise a portfolio using only call options and...Ch. 15 - Prob. 29CCh. 15 - Prob. 1CPCh. 15 - Prob. 2CPCh. 15 - Prob. 3CPCh. 15 - Prob. 4CPCh. 15 - Prob. 5CPCh. 15 - Prob. 1WM
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
- he total market value of the equity of Okefenokee Condos is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 2.0 and that the expected risk premium on the market is 5%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Estimate the WACC assuming a tax rate of 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 2.2. What is the…arrow_forwardYou are trying to sell a mutual fund to a customer, who can tolerate losing more than 10% of assets during a bad year if that happened only once every twenty years. If the expected annual return of the fund you are selling is 8% and the daily volatility is 0.72%, explain briefly how likely is it that the customer would buy the fund. Assume that there are 255 trading days in a year.arrow_forwardYou follow the equity index HSI using an index fund in Hong Kong. You have signed aninterest rate swap to exchange the capital gains (losses) from your portfolio, against a sequenceof cash flows based on 3-month Libor plus 25 bp. The cash flows are exchanged every 90 days.All cash payments occur in Hong Kong dollars.The notional principal is 1 million.a. Draw the cash flow diagram for the first year.b. Let It be the value of the index at time t. Suppose you have the following data:I0 = 23,850 I1 = 24,000 L0 = 4.5%What is the net amount exchanged at period 1?arrow_forward
- You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $190 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.5% per year. Assume that the portfolio pays no dividends. a-1. How much of the portfolio should be sold and placed in bills? a-2. How much of the portfolio should be sold and placed in equity? b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? b-2. What action should the manager take?arrow_forwardYou would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $109 at year- end. XYZ currently sells for $109. Over the next year the stock price will increase by 12% or decrease by 12%. The T-bill rate is 6%. Unfortunately, no put options are traded on XYZ Co. a. Suppose the desired put option were traded. How much would it cost to purchase? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost to purchase b. What would have been the cost of the protective put portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Cost of the protective put portfolio c. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 109? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put. (Do not round…arrow_forwardAstock currently trades at $100. In one month its price will either be $125, $100, or $75. 1 sell you a call option on this stock, struck at $95, for $11. | hedge my exposure by purchasing A shares, borrowing 1004 - 11 in order to fund the purchase. The simple rate of interest is 12%. (2) What will my profit/loss be in one month? {b) Is it possible for me to completely hedge my exposure? Explain.arrow_forward
- You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $60 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 5.2% per year. Assume that the portfolio pays no dividends. Required: a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) Portfolio in bills a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) Portfolio in equityarrow_forwardYou are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $70 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 6.2% per year. Assume that the portfolio pays no dividends. Required: a-1. How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) a-2. How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.) b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? (Input the value as a positive value. Do not round intermediate calculations. Round your…arrow_forwardWal-Mart plans to open a new store near Campus. Wal-Mart is going to finance via bond market and stock market. Total capital required is 10 million dollars. 3 million dollars are going to be financed via stock market. Wal-Mart’s beta is 0.70. Three month Treasury Bill rate is 2% (risk free rate) and the S&P500 index return is 8% (market return). How much is the cost of equity to Wal-Mart stockholders? 2% 5% 2% 1%arrow_forward
- You spend many sleepless nights building cash flow models of Facebook Inc. (FB) and are convinced they are undervalued. The current spot price of FB is $204/share. You predict that in 6 months they will reach $240/share. Assume a 2% interest rate per annum. a) You buy a January 2020 call option (t=6 months) for $5.20/share with a strike price of $230/share. Draw a payoff and profit diagram of this position. b) Under what circumstances will you make money?arrow_forwardThe total market value of the equity of Okefenokee Condos is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock currently is 1.5 and that the expected risk premium on the market is 6%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate the discount rate for an expansion of the company's present business. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 2.0.…arrow_forwardYou work in a derivatives section in an investment bank. In August, a customer who holds Texa stock priced at $150 is worried that the stock will fall in price by the end of the year. Assuming the stock does not pay a dividend, can you sell the customer an option that insures that if the stock price falls below $145, their stock plus option payoff will never fall below $145? Explain.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License