a)
To determine: Value of one month call option with $40 as an exercise price.
a)
Explanation of Solution
Given information:
Company H stock prices changes once in a month either by increase in 20% or decreases by 16.7%.
Current price level is $40 and interest rate is 1% per month.
Calculation of value of option:
First, it is necessary to find out the probabilities by using risk-neutral method.
Therefore, the value of p is 48% and,
Therefore, there is 48% of chances that price of stock will rise by 20% and a 52% chances that option will worth of $0 when it matures.
Therefore, the value of call is $3.82
b)
To determine: Value of delta.
b)
Explanation of Solution
Calculation of value of delta:
Hence, the value of option delta is 0.545
c)
To determine: The way payoffs of this call option be replicated based on replicated portfolio method.
c)
Explanation of Solution
Calculation of value of call by using replicating portfolio method:
Hence, the value of call is $3.82
d)
To determine: Value of two month call option with $40 as an exercise price.
d)
Explanation of Solution
Calculation of value of option:
The following option possibilities are as follows,
Month 1-a:
Hence the value of call under month 1-a is ‘0’
Month 1-b:
Therefore, value of the call under month 1-b is $8.4
Month 0:
Therefore, value of the call under month 0 is $4.0
e)
To determine: Value of delta.
e)
Explanation of Solution
Calculation of delta:
Hence, the delta value is 0.572
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Chapter 21 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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