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
Videos
Textbook Question
Chapter 22, Problem 5QP
Two-State Option Pricing Model The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent.
- a. Suppose the current price of the stock is $62. What is the value of the call option if the exercise price is $35 per share?
- b. Suppose the exercise price is $60 in part (a). What is the value of the call option now?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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
Financial Options: Option Exercise Value
Quantitative Problem:
A call option on Barry Enterprises stock has a market price of $10. The stock sells for $22 a share, and the option has an exercise price of $20.50. What is
the exercise value of the option? Round your answer to the nearest cent.
$
One share of Mac Inc. is currently trading at $48 per share. In one year, the price is expected either
(1) rise to $65 or (2) fall to $40. You are interested in purchasing a call option on Mac, Inc. The
option has a strike price of $57 and expires in 1 year. The current risk-free rate for the year is 3%.
Based on binomial options pricing (as shown in class), what is a fair price for this option? Answer to
the nearest cent, with no punctuation. That is, $5.289 should be entered as "5.29".
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
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
- 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_forwardPlease correct answer and don't use hand raitingarrow_forwardA put option written on the stock of Taylor Enterprises (TE) hasan exercise price of $25 and 6 months remaining until expiration.The risk-free rate is 6%. A call option written on TE has the sameexercise price and expiration date as the put option. TE’s stock priceis $35. If the call option has a price of $12.05, then what is the price(i.e., value) of the put option? ($1.31)arrow_forward
- The price of Cilantro, Incorporated, stock will be either $55 or $75 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. Suppose the current price of the company's stock is $60. What is the value of the call option if the exercise price is $45 per share? Suppose the exercise price is $60 in requirement 1. What is the value of the call option now?arrow_forwardThe price of Newgen Corp. stock will be either $94 or $103 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 7.90%. (Do not leave any empty spaces; input a O wherever it is required. Omit "$" sign in your response.) a. Suppose the current price of Newgen stock is $104. What is the value of the call option if the exercise price is $94 per share? (Round the final answer to 2 decimal places.) Call option value b. Suppose the exercise price is $109 in part (a). What is the value of the call option now? Call option valuearrow_forwardThe 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?arrow_forward
- Consider the following information on AAPL. The current stock price is $326.72. The call option has a strike price of $320. The price of the call option is $68. The option has 1 year till expiration. Question: Suppose you purchase the option at the current price and hold it until expiration. If the stock price at expiration is $350, the return on your investment is: -55.88% 44.11% -100% None of the abovearrow_forwardSuppose an investor purchases a 3-month call option and a 3-month put option on ABC stock. The strike of the call option is $60; the strike of the put option is $65. Suppose the price of the put option is $4.20, the price of the call option is $3.50. a. Suppose the price of ABC stock at option expiry is $62 per share. What is the payoff and profit/loss on both options positions? b. What is the maximum profit the investor could have earned on his call option position? On the put position? Edit Minitarrow_forwardThe price of a stock is currently $50. Over the course of the next year, the price is anticipated to rise to $55 or decline to $46. If both outcomes are equally likely and the risk free interest rate is 3%, what is the price of a one year call option with an exercise price of $50 using the binomial model? Multiple Choice $2.43 $2.50 $2.66 $2.70arrow_forward
- You have the following information about LearnMore Inc.’s stock and a two-month call option with a strike price of $140.00. LearnMore Inc.’s current stock price is $100.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. ∏u∏u and ∏d∏d values given here apply to any period. Data Collected for LearnMore Inc. u 1.5032 d 0.5922 ∏u∏u 0.2357 ∏d∏d 0.3555 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of LearnMore Inc.’s stock options? Check all that apply. The option payoff if the stock goes up in two months will be $10.32. The value of the two-month call option with a strike price of $140.00 at the end of two months will be $2.43. The value of the call option will always remain $2.43, irrespective of the time until expiration. LearnMore Inc.’s stock price…arrow_forwardAssume that you have an American call option expiring next year with exercise price of $40 on a stock which currently trades at $35. You expect the stock to increase by a factor of 1.18 and decrease by a factor of 0.75. If the interest rate is 6%, the option value today is closest to: Select one: a. $6.29 b. $8.73 c. $5.93 d. $8.23arrow_forwardUsing the Black-Scholes model find the premium on a call option with an exercise price of $50 on a share currently priced at $40. Assume the riskless rate of 1% per annum and the option has two years to expiration. The risk of the stock is measured by a σ value of 0.15. Decompose the premium into intrinsic value and time value? By how much is the call option priced above minimum value? Repeat the exercise for a current share price of $60.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
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
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