Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 20, Problem 12PS
Option combinations Discuss briefly the risks and payoffs of the following positions:
- a. Buy stock and a put option on the stock.
- b. Buy stock.
- c. Buy call.
- d. Buy stock and sell call option on the stock.
- e. Buy bond.
- f. Buy stock, buy put, and sell call.
- g. Sell put.
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Explain the Selling the Call Option, Buying the Put Option and Buying the Underlying Stock.
Describe what a stock option is. what does it means to buy a "put" or a "call" and what you are expecting the stock to do for each (ie go up or down in price). Discuss when you would make money on a put option and when you would make money on a call option.
2. Graph a call to buy option and explain how its payoff is given. Explain when it is in the money, at the money and out of the money.
Chapter 20 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 20 - Vocabulary Complete the following passage: A _____...Ch. 20 - Option payoffs Note Figure 20.13 below. Match each...Ch. 20 - Option combinations Suppose that you hold a share...Ch. 20 - Put-call parity What is put-call parity and why...Ch. 20 - Prob. 5PSCh. 20 - Option combinations Dr. Livingstone 1. Presume...Ch. 20 - Option combinations Suppose you buy a one-year...Ch. 20 - Prob. 8PSCh. 20 - Prob. 9PSCh. 20 - Option values How does the price of a call option...
Ch. 20 - Option values Respond to the following statements....Ch. 20 - Option combinations Discuss briefly the risks and...Ch. 20 - Option payoffs The buyer of the call and the...Ch. 20 - Option bounds Pintails stock price is currently...Ch. 20 - Putcall parity It is possible to buy three-month...Ch. 20 - Prob. 16PSCh. 20 - Option values FX Bank has succeeded in hiring ace...Ch. 20 - Option combinations Suppose that Mr. Colleoni...Ch. 20 - Put-call parity A European call and put option...Ch. 20 - Putcall parity a. If you cant sell a share short,...Ch. 20 - Putcall parity The common stock of Triangular File...Ch. 20 - Prob. 23PSCh. 20 - Option combinations Option traders often refer to...Ch. 20 - Option values Is it more valuable to own an option...Ch. 20 - Option values Table 20.4 lists some prices of...Ch. 20 - Option values Youve just completed a month-long...Ch. 20 - Prob. 29PSCh. 20 - Prob. 30PS
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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
- Describe how a typical stock option plan works. What are someproblems with a typical stock option plan?arrow_forwardBoth call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. When the exercise price increases, option prices increase. 2. An option is more valuable the longer the maturity. 3. The effect of the time to maturity on the option prices is indeterminate. 4. As the risk-free rate increases, the value of the option increases.arrow_forwardBriefly describe the use of stock options in acompensation plan. What are some potential problems with stock options as a form ofcompensation?arrow_forward
- a. Explain the covered call options strategy b. Graphically show a covered call options strategy, including payoff. Explain why an investor mayuse this option strategy.c. Using put-call parity, explain the shape of the payoff line (in part (a) of this question). Whatoption position does it look like and why?arrow_forwarda)discuss the put-call parity of options on futures, and use it to value put options on futures. b)discuss the pricing model for options on futures. c) demonstrate an understanding of butterfly spreads by defining butterfly spreads, discussing the circumstances under which investors would use a butterfly spread strategy. d) demonstrate an understanding of straddles by defining straddles, discussing the circumstances under which investors would use a straddle strategy. e) demonstrate an understanding of box spreads by defining box spreads, discussing the circumstances under which investors would use a box spread strategy.arrow_forwardBoth call and put options are affected by the following five factors: the exercise price, the underlying stock price, the time to expiration, the stock’s standard deviation, and the risk-free rate. However, the direction of the effects on call and put options could be different. Use the following table to identify whether each statement describes put options or call options. Statement Put Option Call Option 1. An option is more valuable the longer the maturity. 2. A longer maturity in-the-money option on a risky stock is more valuable than the same shorter maturity option. 3. When the exercise price increases, option prices increase. 4. As the risk-free rate increases, the value of the option increases.arrow_forward
- 4. Answer the following questions on exotic options: (a) Discuss the differences between a combination and a spread when constructing portfolios of options. (b) Define a long strangle and represent the profit function. (c) Design a forward contract on a stock with a particular delivery price and delivery date as a combination of options on the same underlying asset.arrow_forwarddiscussed that equity can be thought of as an option on the firm. If this is true, answer the following four questions: a) What type of option is it (i.e., the term that indicates what the option holder has the right to do)? b) Who sells (i.e., writes) the option? c) Who buys (i.e., holds) the option? d) What is the strike/exercise price?arrow_forwardDefine the terms, or give short explanations. -naked short sale -notional amount -option -option on futures -option price/premium -over-the-counter marketarrow_forward
- Select all that are true with respect to option valuation: Group of answer choices The holder of a call option has rights to the dividend on the underlying stock. The holder of a put option has rights to the dividend on the underlying stock. A call option on a dividend paying stock would be worth less than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend). A call option on a dividend paying stock would be worth more than a call option on that same stock if it were non-dividend paying (i.e., all else is equal other than the dividend).arrow_forwardWhat are the steps in valuing a call option when the binomial tree describing an underlying stock price has more than one sequential up/down jumps?arrow_forwardConsider a stock that pays no dividends on which a futures contract, a call option, and a put option trade. The maturity date for all three contracts is T, the exercise price of both the put and the call is X, and the futures price is F. Show that if X = F, then the call price equals the put price. Use parity conditions to guide your demonstration.arrow_forward
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