EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
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).
- a. What is the value today of a one-year at-the-money European put option on Eagletron stock?
- b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $20?
- 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?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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.)
Chapter 21 Solutions
EBK CORPORATE FINANCE
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...
Additional Business Textbook Solutions
Find more solutions based on key concepts
Should the project be accepted? Why or why not?
Foundations Of Finance
(Future and present value using a calculator) In 2016 Bill Gates was worth about $82 billion. Let’s see what Bi...
Foundations of Finance (9th Edition) (Pearson Series in Finance)
In the firm the stock is actively traded in the securities markets need not concern in the diversification and ...
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
The cost of capital. Introduction: The cost of capital is the opportunity cost involved in making a specific in...
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Horizontal analysis(Learning Objective 2)15-20 min. Below are net sales and net income data for a five-year per...
Financial Accounting, Student Value Edition (5th Edition)
Ravenna Candles recently purchased candleholders for resale in its shops. Which of the following costs would be...
Financial Accounting (12th Edition) (What's New in Accounting)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider a 2-year European put with a strike price of $52 on a stock whose current stock price is $50. Suppose that there are two time steps, and in each time step the stock price either moves up by 30% or moves down by 30%. Also suppose that risk-free rate is 7% per annum with continuous compounding. What is the value of the European put option?arrow_forwardConsider a European put option on a non-dividend paying stock with exercise price 100 USD and expiration time in one year. Interest rate is 1 percent and the price of the stock today is 75 USD. For what price of the option is the Black-Scholes implied volatility equal to 0.35 Use excel.arrow_forwardA stock is selling today for $110. The stock has an annual volatility of 64 percent and the annual risk-free rate is 7 percent. Calculate the fair price for a 1 year European call option with an exercise price of $95. Calculate how much the current stock price would need to change for the purchaser of the call option to break even in one year. Calculate the fair price for a 1 year European put option with an exercise price of $95. Calculate how much the current stock price would need to change for the purchaser of the put option to break even in one year. Calculate the level of volatility that would make a $95 call option sell for $30. (Use Goal Seek or Solver). Calculate the level of volatility that would make a $95 put option sell for $8. (Use Goal Seek or Solver). Please show work in excel and functions/equations used.arrow_forward
- Assume a stock price is g120, and in the next year, it will either rise by 10 percent or fall by 20 percent. The risk-free interest rate is 6 percent. A call option on this stock has an exercise price of g130. What is the price of a call option that expires in one year? What is the chance that the stock price will rise?arrow_forwardOptival’s stock is currently trading at $60 per share with a historical volatility of 20%. The risk-free rate is 4%. Consider a European call and put option on Optival’s stock with an exercise price of $55 that expires in 2 years. Use excel or a similar program to determine the option price using the Black-Scholes formula. (a): What is the value the European call and put option on Optival’s stock with a strike price of $60? (b): To the nearest cent, how much does the option value change for the following adjustments to the input values: ∆ in Call Value ∆ in Put Value ↑ stock price by $1 to $61 ↑ strike price by $1 to $56 ↑ the rF by 1% to 5% ↑ volatility by 1% to 21% ↑ time to maturity by 1 yr (c): Why does the value of the call increase by less than $1 when the stock price increases by $1? (d): To the nearest percent and holding all else constant, how high would the risk-free rate need to be for a 1 year increase in time to maturity to have a negative impact on the value of…arrow_forwardConsider a 3-month European call option on a non-dividend-paying stock. The current stock price is $20, the risk-free rate is 6% per annum, and the strike price is $20. Assume a risk-neutral world. You calculate the following values using the Black-Scholes-Merton model: d1 = 0.2000 N(d1) = 0.5793 d2 = 0.1000 N(d2) = 0.5398 a) What is the probability that the call option will be exercised? b) What is the expected stock price at the option’s expiration in 3 months? Assume that all values of the stock price less than $20 are counted as zero. c) What is the expected payoff on the option at expiration (in 3 months)? d) Calculate the PV of the expected payoff from part c).arrow_forward
- Consider a European put and a European call option which are both written on a non-dividend paying stock, have the same strike price K = £80 and expire in T = 2 months. These options are trading for p = £21 and c = £30.80, respectively. The underlying stock price is S0 = £90. The continuously compounded risk-free rate of interest is r = 10% per annum. What is the present value of the arbitrage profit? Please explain your answer and show your workings. In your response, please show all cash flows (both today and at expiration) and explain why this is an arbitrage (i.e. risk-less) profit.arrow_forwardA. Consider a stock worth K12.50 that can go up or down by 15% per period. Assume aperiod process of one. The risk-free rate is 10%. Find the value of the call optiontoday, with the strike price of K11.50. B. What is the price of a European put option on a non-dividend paying stock when thestock price is K69, the strike price is K70, the risk-free rate is 5% per annum, thevolatility is 35% per annum, and the time to maturity is 6 months?arrow_forwardA stock has a current price of $67. An option on this stock that expires in six months has an exercise price of $65. The stock will pay a dividend of $5 in three months. Assume an annualized volatility of 30% and a continuously compounded risk - free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to calculate the value of this call.arrow_forward
- What would be the price of a two-month European put option on a non-dividend-paying stockwhen the stock price is $68.50, the strike price is$70, and the risk-free interest rate is 5% per annum?Assume a volatility of 60% for this stock.arrow_forwardConsider a European call option on a stock with current price $100 and volatility 25%. The stock pays a $1 dividend in 1 month. Assume that the strike price is $100 and the time to expiration is 3 months. The risk free rate is 5%. Calculate the price of the the call option.arrow_forwardSuppose that shares of FC Inc. are trading at $100. Consider an American put option withstrike price 110. The option matures two periods from now and it pays no dividends. The price can go upby 15% or down by 10% in each period. What is the price of the option today? The risk-free rate is 7%.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Accounting for Derivatives Comprehensive Guide; Author: WallStreetMojo;https://www.youtube.com/watch?v=9D-0LoM4dy4;License: Standard YouTube License, CC-BY
Option Trading Basics-Simplest Explanation; Author: Sky View Trading;https://www.youtube.com/watch?v=joJ8mbwuYW8;License: Standard YouTube License, CC-BY