You are asked to price options on KYC stock. KYC’s stock price can go up by...

You are asked to price options on KYC stock. KYC’s stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. KYC does not pay dividend. The risk free rate is 5% (EAR), and the current stock price of KYC is $100.

Price a European put option on KYC with maturity of 2 years and a strike price of 100.
Given the price of the put option that you calculated in a), specify the ranges of KYC share price at the option’s maturity date for which you will be making a net proﬁt.
What is the price of the Call option at the same strike price?
Suppose you expect the price of KYC stock to have little variance in the future. How would you design a strategy (using options) to take advantage of this? Show your strategy explicitly. What are the payoffs of your strategy? What is the range in which you will make profits?

Solutions

Expert Solution

Ans(a). Uploaded through Photo.

Ans(b). For given time ,t=2 years

The option will be in the money for any price ranging between $0 and $100 for S , Say K=$100

Moreover, initially at t=0 the sum paid was $2.76. Hence, the profits share will range between $0 and $97.24

Mathematically, it's nothing but : $100-$2.76= $97.24

Therefore, after two years the initial which we paid ($2.76) will have worth around 2.76 x (1.05)2=$3.04.

Ans(c). Uploaded through Photo.

Ans(d): We can the Spreaded Butterfly Strategy in order to take advantage of this as we can assume that the price of the asset will not going to change majorly and will remain constant.

A long butterfly spread with calls is a three-section methodology that is made by getting one call at a lower strike value, selling two calls with a higher strike cost and getting one call with a significantly higher strike cost.The maximum profit is equivalent to the distinction between the least and center strike costs less the net expense of the position including commissions, and this benefit is acknowledged whether the stock cost is equivalent to the strike cost of the short calls (focus strike) at termination

Rahul Sunny answered 1 month ago

Next > < Previous

Related Solutions

Suppose a stock currently trades at a price of 150. The stock price can go up...

Suppose a stock currently trades at a price of 150. The stock price can go up 33% or down 15%.The risk free rate is 4.5% 1. use a one period binomial model to calculate the price of a put option with exercise price of 150. 2. Suppose the put price is currently 14, show how to execute an arbitrage transaxtion that will earn more than the risk free rate . use 10,000 put options. 3. Suppose the put price is...

A stock with current price of $30 can only go up or down by $2 each...

A stock with current price of $30 can only go up or down by $2 each month. The probability that the stock goes up in price is 60% each month. The continuously compounding interest rate is 3% p.a. Use a binomial tree with 2 time steps to price an American put option with a strike of $32. Compute the value by setting up delta-hedged portfolios along the way and working out the cost.

A stock price is $100 now. In one month it can go 10% up or down....

A stock price is $100 now. In one month it can go 10% up or down. In the second month it can go 10% up or down. The annual interest rate is 10% with continuous compounding. Use risk-‐free portfolios to determine the value of: (do not use probabilities) a) A two-‐month European call with strike price 100 b) A two-‐month European call with strike price 104

You believe ABC stock will likely go up in the near term. The current stock price...

You believe ABC stock will likely go up in the near term. The current stock price is $25. You decide to buy 10 ABC option contracts with $24 strike price that expires in 6 months. You are paying $2 per share call premium for the option. a) What’s the intrinsic value of this call option? b) What’s the breakeven stock price? c) Draw an option pay-off diagram of this long call position; d) If 6 months later, the stock price...

Consider a binomial world in which the current stock price of 80 can either go up...

Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions 12 through 15 about a call with an exercise price of 80.What is the hedge ratio if the stock goes down one period? 2 period

A stock is currently selling for $50. The stock price could go up by 10 percent...

A stock is currently selling for $50. The stock price could go up by 10 percent or fall by 5 percent each month. The monthly risk-free interest rate is 1 percent. Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method.) A. $5.10 B. $3.96 C. $4.78 D. $1.19 Why is it A

Consider a stock which is currently selling at $4.5. The stock price will either go up...

Consider a stock which is currently selling at $4.5. The stock price will either go up to $5 + x with probability 0.5 or go down to $5 − x with probability 0.5 one period later. The one-period riskless rate of interest is 5%. a) What are the market prices of at-the-money put options that expire at the end of the period when x is set equal to $0.5, $1, $1.5, $2, and $2.5, respectively? b) Plot the one-period put...

Consider a stock which is currently selling at $4.5. The stock price will either go up...

Consider a stock which is currently selling at $4.5. The stock price will either go up to $5 + x with probability 0.5 or go down to $5 − x with probability 0.5 one period later. The one-period riskless rate of interest is 5%. (a) What are the market prices of at-the-money call options that expire at the end of the period when x is set equal to $0.5, $1, $1.5, $2, and $2.5, respectively?

The current price of Kilot Corporation is $30.00. Its stock price will either go up by...

The current price of Kilot Corporation is $30.00. Its stock price will either go up by 30% or down by 30% in one year. The stock has no dividends. The one year risk free rate is 4%. Using the binomial model, calculate the price of a one years put option on Kilot Stock with a strike price of $32. (show your calculations; use a binomial tree/timeline with two branches to summarize the information)

You are given the following information concerning options on a particular stock: Stock price =...

You are given the following information concerning options on a particular stock: Stock price = $62 Exercise price = $60 Risk-free rate = 5% per year, compounded continuously Maturity = 3 months Standard deviation = 45% per year a. What is the intrinsic value of each option? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.) Value Call option $ Put option $ b. What is the time...

Subjects