Fundamentals of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259722615
Author: Richard A Brealey, Stewart C Myers, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 23, Problem 22QP
a)
Summary Introduction
To compute: The percentage return of call option with a strike price of $750 and if the price of stock increases.
b)
Summary Introduction
To compute: The percentage return when the price of the stock decreases.
c)
Summary Introduction
To discuss: The riskier one option or stock.
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Students have asked these similar questions
Consider a put option on a stock that currently sells for £100, but may rise to £120 or
fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90.
(a) Calculate the value of the put option using the risk-neutral valuation relationship
(RNVR). Explain the reasoning behind your calculations.
2) Below are call and put option prices for Exxon, expiring on November 17, 2017. The prices are from
September 8, 2017. The price of the stock on September was $78.81. Given all this, what annual interest
rate is implies by these prices?
Some hints:
Use put-call parity, and the exponential formula for the price of money.
There will be several implied interest rates, one for each strike price.
You have to take a natural logarithm to calculate the answers.
The natural log of exp(A)=A.
Calculate interest rates to five digits
Strike
Price
75
77.5
80
82.50
85
Put
Call
Price Price
4.61
2.69 1.64
1.30
0.94
0.51
2.90
4.84
0.16 8.90
Consider a put option on a stock that curretly sclls for £100, but may rise to £120 or
fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90.
(a) Calculate the value of the put option using the risk-neutral valuation relationship
(RNVR). Explain the reasoning behind your calculations.
(b) Calculate the value of the put option by using first principles (No Arbitrage prin-
ciples). Explain the reasoning behind your calculations.
(c) What is the price of a call option on the same stock with the same exercise price
and the same expiration date? Explain the reasoning behind your calculations.
Chapter 23 Solutions
Fundamentals of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Prob. 3QPCh. 23 - Prob. 4QPCh. 23 - Prob. 5QPCh. 23 - Prob. 6QPCh. 23 - Prob. 7QPCh. 23 - Prob. 8QPCh. 23 - Prob. 9QPCh. 23 - Prob. 10QP
Ch. 23 - Prob. 11QPCh. 23 - Prob. 12QPCh. 23 - Prob. 13QPCh. 23 - Prob. 14QPCh. 23 - Prob. 15QPCh. 23 - Prob. 16QPCh. 23 - Prob. 17QPCh. 23 - Prob. 18QPCh. 23 - Prob. 22QPCh. 23 - Prob. 23QPCh. 23 - Prob. 24QPCh. 23 - Prob. 25QPCh. 23 - Prob. 26QPCh. 23 - Prob. 27QPCh. 23 - Prob. 28QPCh. 23 - Prob. 29QPCh. 23 - Prob. 30QPCh. 23 - Prob. 31QP
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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
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- assume that expected return of the stock A in Rachel's portfolio is 13.6% this year.The risk premium on the stock of the same industry are 4.8%.beta of the stock is 1.5 and the inflation rate was 2.7. a)Calculate the risk-free rate of return using capital market asset pricing model please provide the workings for finding risk free rate finding adjusted rate of return(inflation adjusted) finding Risk free rate of return using CAPM modelarrow_forward3. A stock has a 15 percent change of moving either up or down per period and is currently priced at $25. Using a one period binomial model, and assuming that the risk-free rate is 10 percent, complete the following. a. Determine the possible stock prices at the end of the first period. b. Calculate the intrinsic values at expiration of an at-the-money European call option. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk-free rate regardless of the outcome, assuming that the call sells for the value you obtained in c. e. Determine the rate of return from a riskless hedge if the call is selling for $3.50 when the hedge is initiated.arrow_forwardwhat is the expected return and should you buy it?arrow_forward
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