Question

In: Finance

Today is April 15 (denoted "time 0"). XYZ stock may or may not pay dividends before...

Today is April 15 (denoted "time 0"). XYZ stock may or may not pay dividends before September 1. (No data on this.) Consider the following forward contracts on XYZ stock, all expiring on September 1 (denoted "time T"). Assuming that all these contracts are "fairly priced," complete the missing numbers, and (algebraically) the right column, from the long party's perspective. It is given that B(0,T) = $0.9800 This is the price today, per $1 face value, of a T-bill (government zero-coupon bond) maturing on Sept. 1.

Apr. 15 value (down payment) | Delivery price on Sept. 1 | Thus the payoff for the long party is

Contract 1 $8 | $65 | S(T) -65

Contract 2 …………. | 0 | ………………..

Contract 3 0 | ……… | ………………..

Contract 4 …………. | $75 | ………………..

Contract 5 $2 | ……… | ………………..

In other words, Contract 1 is fully specified. Based on that, you need to complete the other contracts. There is no need to show work

Expert Solution

The above question is regarding the pricing of the call option. We will use basic call option pricing formula to solve the above:

But for that we need to know

r: interest rate for the time period

: current stock price.

The solution is as:

jeff jeffy answered 2 years ago

Shares of XYZ stock (which does not pay dividends) are trading at $460. The prices of...

Shares of XYZ stock (which does not pay dividends) are trading at $460. The prices of European options on XYZ with 1 year to expiry are as follows: Strike Call Put 440 83.99 59.26 445 81.67 61.89 450 79.40 64.56 455 77.18 67.30 460 75.02 70.08 465 72.92 72.92 470 70.86 75.81 475 68.86 78.76 480 66.90 81.75 (a) What is the one-year forward price of XYZ? (b) What is the riskless rate of interest? (c) You become convinced that...

Suppose our underlying is a stock XYZ. Today (t=0), XYZ is priced at $1,094. The storage...

Suppose our underlying is a stock XYZ. Today (t=0), XYZ is priced at $1,094. The storage and insurance cost is $10, paid in advance. The forward contract uses XYZ as the underlying, which will expire in one year from today. The interest rate is 0.04. The forward price at today (t=0) is $1,440. What is the arbitrage profit that you can make today based on cost-of-carry model, if you are only allowed to either long or short one forward contract...

A stock will pay no dividends for the next 7 years. Then it will pay a...

A stock will pay no dividends for the next 7 years. Then it will pay a dividend of $9.62 growing at 4.31%. The discount rate is 11.34%. What should be the current stock price?

Suppose XYZ stock costs $100/share today and is expected to pay $1.25/share quarterly dividend with the...

Suppose XYZ stock costs $100/share today and is expected to pay $1.25/share quarterly dividend with the first coming 3 months from today and the last just prior to the end of the year (from today). Price a one-year forward contract on the XYZ stock if you know that the annual continuously compounded risk-free rate is 10%. If the one –year forward contract on XYZ stock is listed at $108, do you see any arbitrage profit opportunity in this case? If...

XYZ corp is expected to pay dividends of $2.00 at the end of every year for...

XYZ corp is expected to pay dividends of $2.00 at the end of every year for the next 3 years. If the current price of XYZ corp is $20, and XYZ’s equity cost of capital is 25%, what price would you expect XYZ’s stock to sell for at the end of three years (immediately after the third dividend is paid)? A- $39.06 B- $31.44 C- $16.10 D- $20.00

XYZ corp is expected to pay dividends of $3.50 at the end ofevery year for...

XYZ corp is expected to pay dividends of $3.50 at the end of every year for the next 3 years. If the current price of XYZ corp is $15, and XYZ’s equity cost of capital is 20%, what price would you expect XYZ’s stock to sell for at the end of three years (immediately after the third dividend is paid)?

The current stock price of Alcoa is $115, and the stock does not pay dividends. The...

The current stock price of Alcoa is $115, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa's stock is 35%. You want to purchase a put option on this stock with an exercise price of $120 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk.

A cell phone supplier claims that the operating time before failure of its devices (denoted X...

A cell phone supplier claims that the operating time before failure of its devices (denoted X and expressed in years) follows an exponential law of theta parameter. We know that 60% of devices operate without failure for at least 2 years. a) What is the average lifespan of the devices? b) What is the time t such that 50% of the devices operate less than t years? c) If you have had a device from this manufacturer for 2 years,...

Financial Technology Corp. is expected to pay a dividend of $3.30 today but dividends are expected...

Financial Technology Corp. is expected to pay a dividend of $3.30 today but dividends are expected to grow at 5% per year going forward. The required return is 9.5%. What is the price expected to be in year 4?

Assume a stock currently pays no dividends today, but expected to begin paying dividends $6 per...

Assume a stock currently pays no dividends today, but expected to begin paying dividends $6 per share in 4 years. The dividends are expected to have a constant growth rate of 6% at that time and firm has a cost of equity of 11.4%. Using the dividend discount model, what do you estimate the share price should be?