The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid. Introduction: Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

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Answer 1

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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(d) Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 27, 2019 using the following assumptions Assumptions Discount rate (WACC) Common shares outstanding 7.60% 5,029.00 million Net nonoperating obligations (NNO) $(8,747) million NNO is negative, which means that Cisco has net nonoperating investments CSCO ($ millions) DCF Model Reported 2019 Forecast Horizon 2020 Est. 2021 Est. 2022 Est. 2023 Est. Terminal Period Increase in NOA FCFF (NOPAT - Increase in NOA) $ 1241 1303 1368 10673 11207 11767 1437 $ 12354 302 ✓ Present value of horizon FCFF 9918 9679 9445 ✔ 0 × Cum. present value of horizon FCFF $ 0 × Present value of terminal FCFF 0 ☑ Total firm value 0 ☑ NNO -8747 ✓ Firm equity value $ 0 ☑ Shares outstanding (millions) 5029 Stock price per share $ 40.05

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Answer 2

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Answer 3

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Expert Solution & Answer

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Answer 4

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Answer 5

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 6

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

Answer 7

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

Answer 8

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

Answer 9

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

Answer 10

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 11

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author explains the use of the put-call parity equation to compute the price of a 3-month call option and put option.

Videos

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Chapter 20 Solutions

Solution Summary: The author explains the use of the put-call parity equation to compute the price of a 3-month call option and put option.

Videos

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending. Introduction: Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Want to see the full answer?

Chapter 20 Solutions

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.