FINANCIAL MANAGEMENT(LL)-TEXT
16th Edition
ISBN: 9781337902618
Author: Brigham
Publisher: CENGAGE L
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Chapter 8, Problem 4MC
1.
Summary Introduction
Case summary:
Person X was hired by Company T as a financial analyst and he was asked to prepare a brief report which can be used by the executives to attain a cursory understanding on the topic. He used question and answer format to prepare the report. After the questions being drafted person X needs to answer to the questions.
To discuss: The stock price ending values and payoffs of the call option.
2.
Summary Introduction
To determine: The number of shares to buy to create a riskless payoff portfolio and pyof of the portfolio.
3.
Summary Introduction
To determine: The
4.
Summary Introduction
To determine: The replicating portfolio and arbitrage
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Consider a stock with a current price of P = $27.Suppose that over the next 6 months the stockprice will either go up by a factor of 1.41 or downby a factor of 0.71. Consider a call option on thestock with a strike price of $25 that expires in6 months. The risk-free rate is 6%.(1) Using the binomial model, what are the endingvalues of the stock price? What are the payoffsof the call option?
Consider shorting a call option c on a stock S where S = 24 is the value of the stock, K = 30 is the strike price, T = ½ is the expiration date, r = 0.04 is the continuously compounded interest rate per year, and = 0.3 is the volatility of the price of the stock. Determine the delta ratio Δ .
Consider a stock with a current price of P $27
Suppose that over the next 6 months the stock
price will either go up by a factor of 1.41 or down
by a factor of 071. Consider a call option on the
stock with a strike price of $25 that expires in
6 months. The nsk-free rate is 6%.
(1) Using the binomial model, what are the ending
values of the stock price? What are the payoffs
of the call option?
(2) Suppose you write one call option and buy N
shares of stock How many shares must you
buy to create a portfolo with a riskless payoff
Ge, a hedge portfolio)? What is the payoff of
the portfolio?
13)What.is the.present.value of the hedge port-
Tolot What &the value of phe calt.option?
(4) What s a teplieatirg portfolio What is
2otrage?
Chapter 8 Solutions
FINANCIAL MANAGEMENT(LL)-TEXT
Ch. 8 - Define each of the following terms:
Option; call...Ch. 8 - Why do options sell at prices higher than their...Ch. 8 - Describe the effect on a call option’s price that...Ch. 8 - A call option on the stock of Bedrock Boulders has...Ch. 8 - The exercise price on one of Flanagan Company’s...Ch. 8 - Assume that you have been given the following...Ch. 8 - The current price of a stock is $33, and the...Ch. 8 - Use the Black-Scholes model to find the price for...Ch. 8 - The current price of a stock is 20. In 1 year, the...Ch. 8 - The current price of a stock is $15. In 6 months,...
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- You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of return on Stocks X and Y? c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forwardSuppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = .40. What would be the appropriate values for u and d if your binomial model is set up using:a. 1 period of 1 year.b. 4 subperiods, each 3 months.c. 12 subperiods, each 1 month.arrow_forward4. Consider a stock with a current price of S0 = $60. The value of the stock at time t = 1 can take one of two values: S1,u = $100, S1,d = $40. The price of a risk-free bond that pays out $1 in period t = 1 is $0.90. (a) Using a one-step binomial tree, write down the possible payoffs of a put option on stock S with strike K = $60 and maturity t = 1. (b) What is the price of this put option? (c) What is the price of a call option with strike K = $60 and maturity t = 1? Please use put-call parity to find the call price.arrow_forward
- Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?arrow_forwardConsider a stock portfolio consisting of two units of S' and one unit of S2. Calculate the probability of delta losses over one day, if the daily log-returns (X1, X2) of the stocks are independent with X1 are S = 100, S = 50. N(0.5, 1.1), X2 N(-0.2,0.5) and the current stocks valuearrow_forwardIn this problem we assume the stock price S(t) follows Geometric Brownian Motion described by the following stochastic differential equation: dS = µSdt + o Sdw, where dw is the standard Wiener process and u = 0.13 and o = current stock price is $100 and the stock pays no dividends. 0.20 are constants. The Consider an at-the-money European call option on this stock with 1 year to expiration. What is the most likely value of the option at expiration? Please round your numerical answer to 2 decimal places.arrow_forward
- Suppose you are attempting to value a 1-year expiration option on a stock with volatility (i.e., annualized standard deviation) of σ = 0.34. What would be the appropriate values for u and d if your binomial model is set up using: a. 1 period of 1 year. b. 4 subperiods, each 3 months. c. 12 subperiods, each 1 month. Note: Do not round intermediate calculations. Round your answers to 4 decimal places. Subperiods At = T/n u = exp(σ√ At) d = exp(-σ√ At) a. 1 1/1 = 1 b. 4 1/4 = 0.25 C. 12 1/12 0.0833arrow_forwardPlease help solve in Excel. Suppose there is a stock that has a current price of $89.50. The risk free rate is 1%. There is an option with a price of $8.67 and a strike price of $85. This option will expire in 4 months. What is the implied volatility of this stock?arrow_forwardYou have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 -12 % 0.2 4 % 0.1 11 0.2 7 0.3 14 0.3 11 0.3 30 0.2 17 0.2 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place.Stock X: % Stock Y: % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places.Stock X: % Stock Y: % Which stock would you consider to be riskier? is riskier because it has a standard deviation of returns.arrow_forward
- answer each part correctly PLEASE.arrow_forwardImagine all investors are risk-neutral and we have the following binomial tree: 0 Stock: So= 80 1 100 72 2 120 90 86.4 64.8 Using the risk-neutral option valuation approach, calculate the price of a two-year put option on this stock with a strike price $92. Assume that the risk-free rate is 3% per year. Also assume the stock does not pay a dividend. Pick the closest number.arrow_forwardConsider the following information on a particular stock: Stock price = $89 Exercise price = $85 Risk-free rate = 3% per year, compounded continuously Maturity = 8 months Standard deviation = 59% per year 1. What is the delta of a call option? 2. What is the delta of a put option?arrow_forward
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