Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 20, Problem 17P
Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. If the risk-free interest rate is 10% per year, what is the price of a one-year European call option on Dynamic with a strike price of $35?
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A European put option written on a non-
dividend paying stock that is currently worth
₺100 in the stock market has a strike price of
₺100 and exactly five months left until its
expiration date. If the continuously compounded
annual risk-free rate is observed as 20% per year
across all maturities and the put option is
currently priced at ₺3.20 in the option market,
what should be the theoretical price of a
European call option written on the same stock
that has the same strike price and expiration
date as the put option described?
The price of a stock, which pays no dividends, is $30 and the strike price of a two-year European call option on the stock is $25. The risk-free rate is 8% (continuously compounded). Which of the following is a precise lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Round your answer to 2 decimal places.
a.
$8.42
b.
$8.76
c.
$8.57
d.
$8.70
Suppose a one-year European put option on a stock has an exercise price of $30 and oneyear European call option on the same stock has the same exercise price of $30. The call is worth 3$ and the put is worth 2$. If the one-year interest rate is 1.5%, what is the price of the underlying stock, assuming no arbitrage opportunity?
Chapter 20 Solutions
Corporate Finance
Ch. 20.1 - What is the difference between an American option...Ch. 20.1 - Does the holder of an option have to exercise it?Ch. 20.1 - Prob. 3CCCh. 20.2 - What is a straddle?Ch. 20.2 - Explain how you can use put options to create...Ch. 20.3 - Explain put-call parity.Ch. 20.3 - If a put option trades at a higher price from the...Ch. 20.4 - What is the intrinsic value of an option?Ch. 20.4 - Can a European option with a later exercise date...Ch. 20.4 - How does the volatility of a stock affect the...
Ch. 20.5 - Is it ever optimal to exercise an American call on...Ch. 20.5 - When might it be optimal to exercise an American...Ch. 20.5 - Prob. 3CCCh. 20.6 - Explain how equity can be viewed as a call option...Ch. 20.6 - Explain how debt can be viewed as an option...Ch. 20 - Explain the meanings of the following financial...Ch. 20 - What is the difference between a European option...Ch. 20 - Prob. 3PCh. 20 - Prob. 4PCh. 20 - Prob. 5PCh. 20 - You own a call option on Intuit stock with a...Ch. 20 - Assume that you have shorted the call option in...Ch. 20 - You own a put option on Ford stock with a strike...Ch. 20 - Assume that you have shorted the put option in...Ch. 20 - What position has more downside exposure: a short...Ch. 20 - Prob. 11PCh. 20 - You are long both a call and a put on the same...Ch. 20 - You are long two calls on the same share of stock...Ch. 20 - A forward contract is a contract to purchase an...Ch. 20 - You own a share of Costco stock. You are worried...Ch. 20 - Dynamic Energy Systems stock is currently trading...Ch. 20 - You happen to be checking the newspaper and notice...Ch. 20 - Prob. 20PCh. 20 - Prob. 21PCh. 20 - Prob. 22PCh. 20 - Prob. 23PCh. 20 - Prob. 24PCh. 20 - Prob. 25PCh. 20 - Prob. 26PCh. 20 - Prob. 27PCh. 20 - Prob. 28PCh. 20 - Prob. 30PCh. 20 - Prob. 31P
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- The price of a stock, which pays no dividends, is $30 and the strike price of a three-year European call option on the stock is $27. The risk-free rate is 8% (continuously compounded). Which of the following is a precise lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Round your answer to 2 decimal places. Question 12Answer a. $8.76 b. $8.42 c. $8.57 d. $8.70arrow_forwardThe price of a stock, which pays no dividends, is $30 and the strike price of a three-year European call option on the stock is $27. The risk-free rate is 8% (continuously compounded). Which of the following is a precise lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Round your answer to 2 decimal places. a. $8.76 b. $8.70 c. $8.42 d. $8.57arrow_forwardAMEX stock is currently trading at $150. The price of a European call on AMEX with a strike price of $150 is $5. The call expires in 1-month. The risk-free rate is 2.5%. What is the fair value of a European put on AMEX which has a $150 strike and expires in 1-month? O $3.73 O $4.69 O $5.00 O $5.83arrow_forward
- In an arbitrage-free securities market, there are two nondividend- paying stocks, A and B; both with current price $90. There are two possible outcomes for the prices of A and B one year from now: A B $100 $80 $60 $x Outcome The current price of a one-year 100-strike European put option on B is $15. Find all possible x.arrow_forwardModigliani-Miller Theorem I. 7. Options A. How does the price of a call option respond to the following changes, other things equal? Does the price go up or down? Explain briefly the intuition for your answer. (i). Exercise price rises. (ii). Volatility of stock price rises. 3arrow_forward. A European put option written on a non-dividend paying stock that is currently worth ₺100 in the stockmarket has a strike price of ₺100 and exactly five months left until its expiration date. If the continuouslycompounded annual risk-free rate is observed as 20% per year across all maturities and the put option iscurrently priced at ₺3.20 in the option market, what should be the theoretical price of a European call optionwritten on the same stock that has the same strike price and expiration date as the put option described?arrow_forward
- Suppose that the price of a stock today is at $25. For a strike price of K = $24 a 3-month European call option on that stock is quoted with a price of $2, and a 3-month European put option on the same stock is quoted at $1.5 Assume that the risk-free rate is 10% 3. per annum. (a) Does the put-call parity hold?arrow_forwardC. Draw a graph of the SML and locate the projects (A) and (B) on the graph. 5. Effective Annual Yield (EAY) and Effective Annual Rate (EAR) A. You plan to invest $1,000 for one year and you have the opportunity to invest it at a 12 percent APR, compounded monthly. Alternatively, you could invest the funds at an annual rate of 12.3 percent compounded semiannually. What is the EAY of each alternative? (Hint: You need to carry your answer to at least the fourth decimal place.) Which investment should be chosen? 2arrow_forwardAm. 103.arrow_forward
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