Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 15, Problem 27C
You write a call option with
a. Draw the payoff graph for this strategy at the option expiration date.
b. Draw the profit graph for this strategy.
c. What is the break-even point for this strategy?
d. Is the investor bullish or bearish on the stock?
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An investor wants to follow a spread strategy by buying a put for 6$ with a strike price of 95$ and writing a put for 4$ with a strike price of 90$. a. Draw the graph of strategy payoffs and profits b. Find the equilibrium price of this strategy (the equilibrium price is the market price of the stock where the profit is 0) c. What is the maximum profit and loss from this strategy?
V
You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75.
What is the cost of this strategy?
2. What are the break-even stock prices
2. Derive the single - period binomial model for a put option. Include a single - period example where: u = 1.10, d
= 0.95, Rf = 0.05, SO = $100, X = $100. 3. Assume ABC stock's price follows a binomial process, is trading at SO =
$100, has u 1.10, d = 0.95, and probability of its price increasing in one period is 0.5 (q = 0.5). a. Show with a
binomial tree ABC's possible stock prices, logarithmic returns, and probabilities after one period and two periods. . b.
What are the stock's expected logarithmic return and variance for 2 periods and 3 periods? c. Define the properties of a
binomial distribution.
Chapter 15 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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. 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 - Prob. 26CCh. 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
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- Suppose a put option has X=103 and Premium=16. For a strategy that sells this put, what is the minimum profit? 16arrow_forwardThree put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Draw a profit diagram of your strategy to communicate the range of stock prices that the butterfly spread would lead to a loss. (When you draw a profit diagram, please, do consider option premia.arrow_forwardThis is very simple question, pls solve it quicklyarrow_forward
- Consider the model of Black and Scholes. Consider the cash=or-nothing put option V (T) = 1{S(T)<= K} It pays out one unit of cash if the spot is below the strike at maturity. Evaluate the price of the option.arrow_forwardThree call options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $8, $5, and $3, respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?arrow_forwardSuppose that put options on a stock with strike prices $18 and $20 cost $2 and $3.50, respectively. How can the options be used to create a bull spread? Construct atable that shows the profit and payoff for the spread.arrow_forward
- If put A has T = 0.5, X = 50, sigma = 0.2, and a price of 10, and put B has T = 0.5, X = 50, sigma = 0.2, and a price of 12, which put is written on a stock with a lower price (and why)?arrow_forwardUse the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if S0 = (1 + r)T..arrow_forward* Consider the following portfolio II: long one call with exercise price E₁, long one put with exercise price E2, short one call with exercise price E, and short one put with exercise price E1+E2 E. Consider the case E₁ < E < E2 where E < 2 ⚫ (a) Write down the pay-off function A(S) for the portfolio II. • • (b) What is the value of the pay-off function when S < E₁? (c) What is the value of the pay-off function when E < S < E₂?arrow_forward
- We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.arrow_forward4. Valuation of a Derivative Consider a derivative on a stock with the time to expiration T and the following payoff: 0 K₁ 0 if ST K₁. What is the present value of the derivative? Provide an analytic expression of the price using N(), the cumulative probability distribution function of a standard normal random variable.arrow_forwardWhen the required returns on all stocks are graphed against their corresponding betas, Question 16Answer a.we obtain the security market line b.No option is correct c.we obtain the beta d.we obtain the return linearrow_forward
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