A risky stock is currently trading at $100 and its market value a year later will...

A risky stock is currently trading at $100 and its market value a year later will be either $200 (if certain projects go well for the corporation) or $50 (if things turn out bad for those important projects). There is a one-year zero-coupon bond available with a par value $100 that currently trades for $90. Can you create a portfolio of the stock and the bond that will replicate the payoff of a call option on the stock with strike $100 and expiry in 1 year? Then, can you price the call? Explain carefully how will you do all this.

Solutions

Expert Solution

Formula sheet

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A stock is currently trading at $100. Consider a European call option with 1 year to...

A stock is currently trading at $100. Consider a European call option with 1 year to maturity and strike price $105. The continuously compounded risk-free interest rate is 10% per annum. The option currently trade at $7.5 Calculate the implied volatility.

A stock is currently trading for $100 each month the stock when I the increase in...

A stock is currently trading for $100 each month the stock when I the increase in price by a factor of U equals 1.05 or fall by a factor of D equals 0.90 the risk free rate of interest per month is 0.1668% in simple terms and investment of a dollar at the risk free rate returned 1.01668 after 1 month what is the price of a 100 strike to month European put option?

A company is currently trading at $100 per share. After examining the stock, determined that in...

A company is currently trading at $100 per share. After examining the stock, determined that in each 3 month period, its price will either increase to 25% or decrease by 20%. The interest rare is 3% every 3 months. a) A six month Europrean call option on this company has an exercise price of $90. What is the value of this call option? b) What is the value of a six month European put option on this company with an...

Merv Corp stock is currently trading at $105. The stock price a year from now will...

Merv Corp stock is currently trading at $105. The stock price a year from now will be either $175 or $70 with equal probabilities. The interest rate at which investors invest in riskless assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $150 and an expiration date 1 year from now should be worth __________ today. (Round intermediate calculation to 2 decimal places) $44.24 $43.00 $45.67 $45.06

An at-the-money call option with expiry 100 trading days later (for calculations consider that there are...

An at-the-money call option with expiry 100 trading days later (for calculations consider that there are 250 trading days per year) is written on a stock XYZ. The volatility of the stock is 26% and the stock pays no dividends during the life of the option. The risk free rate is 5%. Can you find the delta of the option? Suppose that you own 5,000 shares of the stock XYZ, how can you use the available call options to make...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you have determined that in each 3 month period its price will either increase to 25% or decrease by 20%. The interest rate is 3% every 3 months. What is the value of a six month European put option on Cassiopeia with an exercise price of $90?

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you have determined that in each 3 month period its price will either increase to 25% or decrease by 20%. The interest rate is 3% every 3 months. a) A six month European call option on Cassiopeia has an exercise price of $90. What is the value of this call option? b) What is the value of a six month European put option on Cassiopeia...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you have determined that in each 3 month period its price will either increase to 25% or decrease by 20%. The interest rate is 3% every 3 months. a)A six month European call option on Cassiopeia has an exercise price of $90.What is the value of this call option? b)What is the value of a six month European put option on Cassiopeia with anexercise price...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you...

Cassiopeia inc. is currently trading at $100 per share. After examining the stock of Cassiopeia, you have determined that in each 3 month period its price will either increase to 25% or decrease by 20%. The interest rate is 3% every 3 months. A six month European call option on Cassiopeia has an exercise price of $90. What is the value of this call option?

An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share....

An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share. The investor is fearful of a sharp decrease of the stock price. He decides to buy 50 December 95 put option at a price of $3, paying $15,000. Note: Each put option contract provides for the right to sell 100 shares of stock. December 95 put option means that the strike price of the put is 95 and it matures in December. If IBM stock...

Subjects