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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Question
Chapter 21, Problem 29PS
a)
Summary Introduction
To determine: Value of infinite lived call option on the non-dividend stock and explain the value.
b)
Summary Introduction
To discuss: Whether this prediction is realistic and explain.
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PART B
What insights does the Black-Scholes option pricing model provide about financial
derivatives? The Black-Scholes model is a mathematical model used to determine the
fair price or theoretical value of a European-style option. It incorporates variables
such as the current stock price, option strike price, time until expiration, risk-free
rate, and stock volatility. The model assumes that stock prices follow a log-normal
distribution and that markets are efficient, with no transaction costs or taxes. While
originally developed for stock options, its principles have been extended to value
various types of financial derivatives. The Black-Scholes model revolutionized the
field of quantitative finance and played a crucial role in the growth of the derivatives
market. Despite its limitations and assumptions, it remains a fundamental tool in
options trading and risk management.
What's the key to profitable long call options?
A. A large number of at-the-money call options.
B. An optionable stock that goes up sufficiently within a certain period.
C. An option position that breaks even early enough before expiration.
D. In-the-money calls.
4
Chapter 21 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 21 - Prob. 1PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Prob. 4PSCh. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - BlackScholes model Use the BlackScholes formula to...Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - American options The price of Moria Mining stock...
Ch. 21 - Prob. 12PSCh. 21 - American options Suppose that you own an American...Ch. 21 - Prob. 14PSCh. 21 - Prob. 15PSCh. 21 - American options The current price of the stock of...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - Prob. 19PSCh. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Prob. 22PSCh. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Prob. 27PSCh. 21 - Prob. 28PSCh. 21 - Prob. 29PS
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- Give me proper detailed Answer of this finance questionarrow_forwardA) Assume that you have some shares of stock in ABC Inc. Why do we say that if you also purchase a put option on the same stock, the price paid to buy the put option is like paying an insurance premium? B) We understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value?arrow_forwardSelect all that are true with respect to the Black Scholes Option Pricing Model (OPM) in practice): Group of answer choices BSOPM assumes that the volatility of the underlying stock returns is constant over time. BSOPM assumes that the underlying stock can be traded continuously. BSOPM assumes that there are no transaction costs. There is only one input to the BSOPM that is not observable at the time you are valuing a stock option, and that input is volatility. Implied volatility is estimated by calculating the daily volatility of the underlying stock’s return that occurred over the prior six months.arrow_forward
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- My question is for a synthetic call option why do we need to borrow the present value of the strike price and what does it mean in a simple language explanation. Similarly why do we need to lend the present value of the stock at risk-free rate and what does it mean in simple language explanation? Please also clarify the significance of risk free rate? Why is it used in put call parity. Synthetic Call Option: If an investor believes that a call option is over-priced, then he/she can sell the call on the market and replicate a synthetic call. Borrow the present value of the strike price at the risk free rate and purchase the underlying stock and a put. Synthetic Put Option: Similar to the synthetic call option. A synthetic put can be created by re-arranging the put-call parity relationship, if the trader believes the put is overvalued. Synthetic Stock: A synthetic stock can also be created by rearranging the put-call parity identity. In this case, the investor will buy the…arrow_forwardWhich is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Choose the correct.a. Write a call option.b. Write a put option.c. Buy a call option.d. Buy a put option.arrow_forwardWhich of the following investors would be happy to see the stock price rise sharply?I) An investor who owns the stock and a put option;II) An investor who has sold a put option and bought a call option;III) correct for projects that have average risk compared to the firm's other assets. An investorwho owns the stock and has sold a call optionIV) An investor who has sold a call optionA) I and II onlyB) III and IV onlyC) III onlyD) IV onlyarrow_forward
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