Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 22, Problem 16QP
Summary Introduction
To compute: Risk-neutral value of the call option.
Risk-Neutral:
Risk-neutral works on the basis, assuming that the call options expected return is equal to the risk free rate. It has been assumed here that the interested investors would not look for the compensation more than the risk free rate.
Call Option:
A call option does not carry any obligation on the right given to an individual to ‘purchase’ an asset at any particular fixed price or given point of time.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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?
The current price of a stock is $33, and the annual risk-free rate is 6%. Acall option with a strike price of $32 and with 1 year until expiration has acurrent value of $6.56. What is the value of a put option written on the stockwith the same exercise price and expiration date as the call option?
The stock price of Copious Corp. is currently $30. The stock price 1 year(s) from now will be either $34 or $27. The annual risk-free rate is 1.4%. Using the binomial model, what is the value of a call option with an exercise price of $30 and an expiration date 1 year(s) from now?
Chapter 22 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Options What is a call option? A put option? Under...Ch. 22 - Options Complete the following sentence for each...Ch. 22 - American and European Options What is the...Ch. 22 - Intrinsic Value What is the intrinsic value of a...Ch. 22 - Option Pricing You notice that shares of stock in...Ch. 22 - Options and Stock Risk If the risk of a stock...Ch. 22 - Option Risk True or false: The unsystematic risk...Ch. 22 - Prob. 8CQCh. 22 - Option Price and Interest Rates Suppose the...Ch. 22 - Contingent Liabilities When you take out an...
Ch. 22 - Options and Expiration Dates What is the impact of...Ch. 22 - Options and Stock Price Volatility What is the...Ch. 22 - Insurance as an Option An insurance policy is...Ch. 22 - Equity as a Call Option It is said that the equity...Ch. 22 - Prob. 15CQCh. 22 - Put Call Parity You find a put and a call with the...Ch. 22 - Put- Call Parity A put and a call have the same...Ch. 22 - Put- Call Parity One thing put-call parity tells...Ch. 22 - Two-State Option Pricing Model T-bills currently...Ch. 22 - Understanding Option Quotes Use the option quote...Ch. 22 - Calculating Payoffs Use the option quote...Ch. 22 - Two-State Option Pricing Model The price of Ervin...Ch. 22 - Two-State Option Pricing Model The price of Tara,...Ch. 22 - Put-Call Parity A stock is currently selling for...Ch. 22 - Put-Call Parity A put option that expires in six...Ch. 22 - Put-Call Parity A put option and a call option...Ch. 22 - Pot-Call Parity A put option and a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Delta What are the deltas of a call option and a...Ch. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Time Value of Options You are given the following...Ch. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Black-Scholes A call option has an exercise price...Ch. 22 - Black-Scholes A stock is currently priced at 35. A...Ch. 22 - Equity as an Option Sunburn Sunscreen has a zero...Ch. 22 - Equity as an Option and NPV Suppose the firm in...Ch. 22 - Equity as an Option Frostbite Thermalwear has a...Ch. 22 - Mergers and Equity as an Option Suppose Sunburn...Ch. 22 - Equity as an Option and NPV A company has a single...Ch. 22 - Two-State Option Pricing Model Ken is interested...Ch. 22 - Two-State Option Pricing Model Rob wishes to buy a...Ch. 22 - Two-State Option Pricing Model Maverick...Ch. 22 - Prob. 29QPCh. 22 - Prob. 30QPCh. 22 - Prob. 31QPCh. 22 - Two-State Option Pricing and Corporate Valuation...Ch. 22 - Black-Scholes and Dividends In addition to the...Ch. 22 - Prob. 34QPCh. 22 - Prob. 35QPCh. 22 - Prob. 36QPCh. 22 - Prob. 37QPCh. 22 - Prob. 38QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
Knowledge Booster
Similar questions
- Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?arrow_forwardBinomial Model The current price of a stock is 20. In 1 year, the price will be either 26 or 16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of 21 and that expires in 1 year. (Hint: Use daily compounding.)arrow_forwardConsider a put option whose underlying asset is a stock index with 6 months to expiration and a strike price of $1000. Suppose the risk-free interest rate for the six months is 2% and that the option’s premium is $74.20. (a) Find the future premium value in six months. (b) What is the buyer’s profit is the index spot price is $1100? (c) What is the buyer’s profit is the index spot price is $900 Only typed answerarrow_forward
- A put option and a call option with an exercise price of $115 and three months to expiration sell for $5.45 and $8.75, respectively. If the risk-free rate is 2.0% per year, compounded continuously, what is the current stock price? $111.13 $121.13 $117.73 $112.40arrow_forwardSuppose that currently, stock BVC is trading at $100 per share. A put option with a strike price of $120 that expires in one year is selling at $11.12. What is the profit to a trader who buys this put option, assuming that in one year the stock price of BVC is $125arrow_forwardConsider a call option on Stock X. The call expires in 7 months and has a strike price X=$22. The current price of stock X is $20. In 7 months, the stock price can either go up to 23 (up state) or go down to $19 (down state). The call premium in the 2 states : $1 in the up state and $0 in the down state. Assume that the risk-free rate is 12% per annum. Calculate the hedge ratio. (Please report your answer using 2 decimals) Continuation of Question 1.Calculate the value of the call in period 0. (Hints: Use continuous discounting when calculating present value. Also, please report your answer using 4 decimals)arrow_forward
- The current price of a stock is $20, and at the end of one year its price will be either $22 or $18. The annual risk-free rate is 2.0% (use daily compounding with 365 days/year), based on daily compounding. A 1-year call option on the stock, with an exercise price of $19, is available. Based on the binominal model, what is the option's value?(Please Show Work)arrow_forwardSuppose the stock price is $20 today. In the next six months it will either fall by 50 percent or rise by 50 percent. What is the current value of a call option with an exercise price of $15 and expiration of one year? The six-month risk-free interest rate is 10 percent (periodic rate). Use the two-stage binomial method. $7.86 $2.14 $8.23 $8.93arrow_forwardThe current price of a stock is $55. In 1 year, the price will be either $50or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expiresin 1 year.a. Find the range of values for the ending stock price and the call option at the option’sexpiration in 1 year.b. Equalize the range of payoffs for the stock and the option.c. Create a riskless hedged investment. What is the value of the portfolio in 1 year?d. What is the cost of the stock in the riskless portfolio?e. What is the present value of the riskless portfolio?f. From your answers in parts d and e, what is the value of the firm’s call option?arrow_forward
- A put option and a call option with an exercise price of $55 and three months to expiration sell for $1.15 and $5.30, respectively. If the risk-free rate is 4.2 percent per year, compounded continuously, what is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current stock pricearrow_forwardSuppose 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_forwardYou are given the following information concerning options on a particular stock: Stock price= Exercise price= Risk-free rate= Maturity= Standard deviation= $83 Intrinsic value=$ $80 6% per year, compounded continuously 6 months 47% per year (a)What is the intrinsic value of the call option? (Please keep two digits after the decimal point.) (b)What is the time premium of the call option? (Please keep two digits after the decimal point.) Time premium of the call option=$arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT