Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 21, Problem 2P
Using the information in Problem 1, use the Binomial Model to calculate the price of a one-year put option on Estelle stock with a strike price of $25.
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Based on the put - call parity, please briefly explain how
to replicate a call option of a stock with a strike price of
$100. Assume that the risk-free rate is 5%.
Suppose that a June call option to buy a share for $65 costs $3.5 and is held until June.
Under what circumstances will the holder of the option make profit
Under what circumstances will the option be exercised?
Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.
Use the data in the figure 20.1 and calculate thepayoff and the profits for investments in each ofthe following January expiration options, assumingthat the stock price on the expiration date is $125.a. Call option, X=$120b. Put option, X=$120c. Call option, X=$125d. Put option, X=$125e. Call option, X=$130f. Put option, X=$130
Chapter 21 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 21.1 - What is the key assumption of the binomial option...Ch. 21.1 - Why dont we need to know the probabilities of the...Ch. 21.1 - Prob. 3CCCh. 21.2 - What are the inputs of the Black-Scholes option...Ch. 21.2 - What is the implied volatility of a stock?Ch. 21.2 - How does the delta of a call option change as the...Ch. 21.3 - What are risk-neutral probabilities? How can they...Ch. 21.3 - Does the binominal model or Black-Scholes model...Ch. 21.4 - Is the beta of a call greater or smaller than the...Ch. 21.4 - What is the leverage ratio of a call?
Ch. 21.5 - Prob. 1CCCh. 21.5 - The fact that equity is a call option on the firms...Ch. 21 - The current price of Estelle Corporation stock is...Ch. 21 - Using the information in Problem 1, use the...Ch. 21 - Suppose the option in Example 21.11 actually sold...Ch. 21 - Eagletrons current stock price is 10. Suppose that...Ch. 21 - What is the highest possible value for the delta...Ch. 21 - Hema Corp. is an all equity firm with a current...Ch. 21 - Consider the setting of Problem 9. Suppose that in...Ch. 21 - Roslin Robotics stock has a volatility of 30% and...Ch. 21 - Rebecca is interested in purchasing a European...Ch. 21 - Using the data in Table 21.1, compare the price on...Ch. 21 - Consider again the at-the-money call option on...Ch. 21 - Harbin Manufacturing has 10 million shares...Ch. 21 - Using the information on Harbin Manufacturing in...Ch. 21 - Using the information in Problem 1, calculate the...Ch. 21 - Prob. 23PCh. 21 - Prob. 24PCh. 21 - Calculate the beta of the January 2010 9 call...Ch. 21 - Consider the March 2010 5 put option on JetBlue...
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- Suppose that a call option with a strike price of $48 expires in one year and has a current market price of $5.17. The market price of the underlying stock is $46.25, and the risk-free rate is 1%. Use put-call parity to calculate the price of a put option on the same underlying stock with a strike of $48 and an expiration of one year. The price of a put option on the same underlying stock with a strike of $48 and an expiration of one year is $. (Round to the nearest cent.)arrow_forwardConsider shorting a call option c on a stock S where S = 24 is the value of the stock, K = 30 is the strike price, T = ½ is the expiration date, r = 0.04 is the continuously compounded interest rate per year, and = 0.3 is the volatility of the price of the stock. Determine the delta ratio Δ .arrow_forwardAssume that the value of a call option using the Black-Scholes model is $8.94. The interest rate is 8 percent, and the time to maturity is 90 days. The price of the underlying stock is $47.38, and the exercise price is $45. Calculate the price of a put using the put-call parity relationship.arrow_forward
- You are evaluating a put option based on the following information: P = Ke-H•N(-d,) – S-N(-d,) Stock price, So Exercise price, k = RM 11 = RM 10 = 0.10 Maturity, T= 90 days = 0.25 Standard deviation, o = 0.5 Interest rate, r Calculate the fair value of the put based on Black-Scholes pricing model. Cumulative normal distribution table is provided at the back.arrow_forward1) Draw the binomial tree listing only the option prices at each node. Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $40, S = $37.90, r = 5.0%, σ = 0.35 2) Draw the binomial tree listing only the stock prices at each node. Assume the following data on a 6-month call option, using 3-month intervals as the time period. K = $70, S = $68.50, r = 6.0%, σ = 0.32 3) Draw the binomial tree listing only the option prices at each node. Assume the following data on a 6-month put option, using 3-month intervals as the time period. K = $40.00, S = $37.90, r = 5.0%, σ = 0.35 4) Using a binomial tree explanation, explain the situation in which an American option would alter the pricing of an option.arrow_forwardYou are interested to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it either increases to $120 or decreases to $80. The risk-free rate of interest is 10%. Calculate the put option's value using the binomial pricing model, presenting your calculations and explanations as follows: a. Draw tree-diagrams to show the possible paths of the share price and put payoffs over one year period. (Note: Show the numbers that are known and use letter(s) for what is unknown in your diagrams.) b. Compute the hedge ratio. c. Find the put option price. Explain your calculations clearly. d. Use put-call parity, find the price of a call option with the same exercise price and the same expiration date.arrow_forward
- Suppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?arrow_forwardA stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.arrow_forwardConsider an American put option (K=$100) expiring in one year on a stock trading for $84. The return volatility on the stock is 27.3% and the riskless rate is 5%. Find the price of the option using a Binomial Model with two steps. (Respond with two decimal places, such as "-12.34") 26.59 Correct Answer: 18.28arrow_forward
- Suppose an investor purchases a 3-month call option and a 3-month put option on ABC stock. The strike of the call option is $60; the strike of the put option is $65. Suppose the price of the put option is $4.20, the price of the call option is $3.50. a. Suppose the price of ABC stock at option expiry is $62 per share. What is the payoff and profit/loss on both options positions? b. What is the maximum profit the investor could have earned on his call option position? On the put position? Edit Minitarrow_forwardAssuming that a September put option to buy a share for $100 costs $4.50 and is held until September. Under what circumstances will the holder of this option make a profit? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.arrow_forwardUse the Black-Scholes formula to find the value of a call option based on the following inputs. (Round your final answer to 2 decimal places. Do not round intermediate calculations.) Stock price Exercise price Interest rate Dividend yield Time to expiration Standard deviation of stock's returns Call value GA $ $ $ 48 60 0.07 0.04 0.50 0.26arrow_forward
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