Corporate Finance
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 21, Problem 7P

Eagletron’s current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR).

  1. a. What is the value today of a one-year at-the-money European put option on Eagletron stock?
  2. b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $20?
  3. c. Suppose the put options in parts a and b could either be exercised immediately, or in one year. What would their values be in this case?
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Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?
Suppose that a stock price is currently 35 dollars, and it is known that four months from now, the price will be either 51 dollars or 29 dollars. Find the value of a European call option on the stock that expires four months from now, and has a strike price of 39 dollars. Assume that no arbitrage opportunities exist and a risk-free interest rate of 10 percent.Answer =dollars.
The current price of a non-dividend-paying stock is $100. The risk free interest rate is 1% per year with continuous compounding. The implied volatility of a one-year at-the-money European vanilla call option is 0.2. (1). What should be the implied volatility of a one-year at-the-money European vanilla put? (2). Compute the price of the put. Express your result in terms of the standard normal cdf (e.g., if you get N(0.01), just keep N(0.01) in your answer.)

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