INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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Chapter 21, Problem 51PS
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To Show that the prices of the put and call will be equal if
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Consider a forward contract on a stock that pays dividends at specific times ti, where 0 < t1 < t2 < ... < tn < T.
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Chapter 21 Solutions
INVESTMENTS(LL)W/CONNECT
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- Suppose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what would be more expensive: a call option on X or Y? Please discuss.arrow_forwardLet X = strike price and S = share price. A put option is deep out-of-the-money if _____________ (choose the best answer from the list below to complete the sentence). X/S is between 1.01 and 1.05 X/S is between 1.06 and 1.15 X/S is between 0.95 and 0.99 X/S is between 0.85 and 0.94 X/S is equal to 1.00arrow_forwardExplain the call-put parity relation and how it is justified. Black-Scholes-Merton formula uses five variables to calculate the price of call and put options. Explain each of these variables incorporated in Black-Scholes-Merton formula. Show how the change in these variables affects the price of option. Show how these variables are grouped to show put-call parity relationship and suggest the condition in which there is an arbitrage opportunity. (Explain each of the things in detail with an appropriate examples)arrow_forward
- Put–Call Parity - A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.arrow_forward4. Valuation of a Derivative Consider a derivative on a stock with the time to expiration T and the following payoff: 0 K₁ 0 if ST K₁. What is the present value of the derivative? Provide an analytic expression of the price using N(), the cumulative probability distribution function of a standard normal random variable.arrow_forwardConsider a call and a put options with the same strike price and time to expiry. Given that the strike price is exactly equals to the forward price, then: A. Put and call have same premium B. The premium of the put is equal to the forward price C. The premium of the put is equal to the premium of the call plus the present value of the strike D. The premium of the call is equal to the forward pricearrow_forward
- True or false explain a. For , when the spot price is the strike price, then the profit/loss will be equal to the spot price minus the minus the premium. b. For , when the spot price is the strike price, then the profit/loss will be equal to the strike price minus spot the price minus the .arrow_forwardfill the missing words: a. For ( ) options, when the spot price is ( ) than(or equal to)the exercise price, then profit/loss equals the premium. b. For ( ) options, when the spot price is ( ) than (or equal to) the exercise price, then the profit/loss will be equal to the option premium.arrow_forwardTick all those statements on options that are correct (and don't tick those statements that are incorrect). O a. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion. Ob. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion. 0 C. If interest is compounded continuously then the put-call parity formula is P+ S(0) = C + Ke where I is the expiry time. Od. In general the equation S(T) + (K − S(T))+ (S(T) — K)† + K is valid. An American put option should never be exercised before the expiry time. e. =arrow_forward
- Consider a call option having the strike price K and exercise time t. Suppose further that thenominal interest rate is r, compounded continuously, and also that the price of the securityfollows a geometric Brownian motion with variance parameter σ^2. Derive the formula that isused to price the unique cost of the option that does not give rise to an arbitrage.arrow_forward6. Equilibrium pricing: Let the subscripts: j = 0 denote the risk-free asset, j = 1,...,n the set of available risky securities, and M the market portfolio. For the questions that follow, assume that CAPM provides an accurate description of reality. a. b. C. d. State the CAPM equation. (1) Use the CAPM equation to show that the following condition is true s; ≤ SM for any j. What is the significance of this condition when interpreted in the context of the capital market line? (5) Assume that B = 0.8, μM = 0.1 and r = 0.05. Using the CAPM, determine the expected return from holding one unit of asset j for one period. (2) Given your answer to c.), what could you conclude (from the perspective of the security market line) if a market survey indicated that the forecasted one- period return on asset j was 8 percent? Describe and motivate the rational trading response that is consistent with your conclusion. (4)arrow_forwardWe showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.arrow_forward
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