EBK MICROECONOMICS
12th Edition
ISBN: 8220100659454
Author: PARKIN
Publisher: PEARSON
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Chapter 5.1, Problem 4RQ
To determine
Identify the examples for each allocation method when it works badly.
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4. Consider a put on the same underlier (Cisco).
The strike is $50.85, which is the forward price.
The owner of the call has the choice or option to buy at the strike.
They get to see the market price S1 before they decide.
We assume they are rational.
What is the payoff from owning (also known as being long) the put?
What is the payoff from selling (also known as being short) the put?
Payoff from Put with
Strike of k=$50.85
S1
Long
$100
$95
$90
$85
$80
$75
$70
$65
$60
$55
$50.85
$50
$45
$40
$35
$30
$25
Short
The following table provides information on two technology companies, IBM and Cisco. Use the
data to answer the following questions.
Company
IBM
Cisco Systems
Stock Price
Dividend
(trailing 12 months)
$150.00
$50.00
$7.00
Dividend
(next 12 months)
$7.35
Dividend
Growth
5.0%
$2.00
$2.15
7.5%
1. You buy a futures contract instead of purchasing Cisco stock at $50.
What is the one-year futures price, assuming the risk-free interest rate is 6%?
Remember to adjust the futures price for the dividend of $2.15.
5. Consider a one-year European-style call option on Cisco stock.
The strike is $50.85, which is the forward price.
The risk-free interest rate is 6%.
Assume the stock price either doubles or halves each period.
The price movement corresponds to u = 2 and d = ½ = 1/u.
S1 = $100
Call payoff=
SO = $50
S1 = $25
Call payoff=
What is the call payoff for $1 = $100?
What is the call payoff for S1 = $25?
Chapter 5 Solutions
EBK MICROECONOMICS
Ch. 5.1 - Prob. 1RQCh. 5.1 - Prob. 2RQCh. 5.1 - Prob. 3RQCh. 5.1 - Prob. 4RQCh. 5.2 - Prob. 1RQCh. 5.2 - Prob. 2RQCh. 5.2 - Prob. 3RQCh. 5.2 - Prob. 4RQCh. 5.2 - Prob. 5RQCh. 5.2 - Prob. 6RQ
Ch. 5.3 - Prob. 1RQCh. 5.3 - Prob. 2RQCh. 5.3 - Prob. 3RQCh. 5.4 - Prob. 1RQCh. 5.4 - Prob. 2RQCh. 5.4 - Prob. 3RQCh. 5.4 - Prob. 4RQCh. 5 - Prob. 1SPACh. 5 - Prob. 2SPACh. 5 - Prob. 3SPACh. 5 - Prob. 4SPACh. 5 - Prob. 5SPACh. 5 - Prob. 6SPACh. 5 - Prob. 7SPACh. 5 - Prob. 8SPACh. 5 - Prob. 9SPACh. 5 - Prob. 10SPACh. 5 - Prob. 11APACh. 5 - Prob. 12APACh. 5 - Prob. 13APACh. 5 - Prob. 14APACh. 5 - Prob. 15APACh. 5 - Prob. 16APACh. 5 - Prob. 17APACh. 5 - Prob. 18APACh. 5 - Prob. 19APACh. 5 - Prob. 20APACh. 5 - Prob. 21APACh. 5 - Prob. 22APACh. 5 - Prob. 23APACh. 5 - Prob. 24APACh. 5 - Prob. 25APACh. 5 - Prob. 26APACh. 5 - Prob. 27APA
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