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
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Textbook Question
Chapter 22, Problem 27QP
Two-State Option Pricing Model Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend-paying common stock, with a strike price of $50 and six months until expiration. The company’s common stock is currently selling for $45 per share, and Rob expects that the stock price will either rise to $68 or fall to 537 in six months. Rob can borrow and lend at the risk-free EAR of 5 percent.
- a. What should the put option sell for today?
- b. If no options currently trade on the stock, is there a way to create a synthetic put option with identical payoffs to the put option just described? If there is, how would you do it?
- c. How much docs the synthetic put option cost? Is this greater than, less than, or equal to what the actual put option costs? Does this make sense?
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Students have asked these similar questions
A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. A European put option allows you to sell a share of stock at a given price, called the exercise price, at a
particular point in time after the purchase of the option. For example, suppose you purchase a she-month European put option for a share of stock with an exercise price of $25. tf six months later, the stock price per share is $26
more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you
can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $25-$22.50-$3.50 per share, less the cost of the option. If you paid $1.00 per put
ption, then your profit would be $3.30-11.00-$2.50 per…
A 6-month European call option on a dividend-paying stock is cur-
rently selling for $1.75. The stock price is $58.56, the strike price is
$55, and a dividend of $1.20 is expected in 2 months and 5 months.
The risk-free interest rate is 3% per annum for all maturities.
(a) What opportunities are there for an arbitrageur? Detail your
answer.
(b) In this market a European put option with same strike price and
maturity is also available for trading. Derive the no-arbitrage
$3.
price of the put option if the call option has a price of c =
%3D
(c) The European put option in the above section is trading at $3.
What opportunities are there for an arbitrageur? Detail your
answer.
Financial Options: Madeline Manufacturing
Quantitative Problem:
Madeline Manufacturing Inc's current stock price is $45 per share. Call options for this stock exist that permit the holder to
purchase one share at an exercise price of $35. These options will expire at the end of 1 year, at which time Madeline's stock will
be selling at one of two prices $25 or $55. The risk-free rate is 5%. Using the binomial option pricing model, create a riskless
hedged investment and answer the following question:
After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfolo in one year?
Round your answer to the nearest cent.
24
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
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