A has a current spot price of $40. Assume the risk-free rate is 5%. Over the...

A has a current spot price of $40. Assume the risk-free rate is 5%. Over the next year, A could either move up to $64 (+60%) or move down to $25 (-37.5%).

1. Draw a single payoff diagram for an investor who buys the call and sells the put; both have strikes of $45. Add a second line incorporating the net premium.

2. A person buys two calls and sells one put. At what price for A will they break even.

Solutions

Expert Solution

ANSWER IN THE IMAGE((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

2.1.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

The FXI (iShares China Large-Cap ETF) has a current spot price of $40. Assume the risk-free...

The FXI (iShares China Large-Cap ETF) has a current spot price of $40. Assume the risk-free rate is 5%. Over the next year, the ETF could either move up to $64 (+60%) or move down to $25 (-37.5%). Consider a one-year call with a $45 strike (out of the money). Calculate the risk-neutral probability (q), write the formula relating premium to the risk neutral probability, and solve it to calculate the premium on the call.

12. The spot price of an investment asset is $40 and the risk-free rate for all...

12. The spot price of an investment asset is $40 and the risk-free rate for all maturities is 8% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? A) $46.32 B) $41.23 C) $43.55 D) $47.31

Current stock price is $50; volatility is 40%; risk free rate is 5%. We have an...

Current stock price is $50; volatility is 40%; risk free rate is 5%. We have an American style put option expires in 6 months. Its strike price is the maximum price over the life of the option; this means: its payoff in 6 months is max(0, Smax– ST). No dividend payments during the 6 months. Use a 2-step CRR binomial model to price this option.

Current stock price is $50; volatility is 40%; risk-free rate is 5%. We have an American...

Current stock price is $50; volatility is 40%; risk-free rate is 5%. We have an American style put option expires in 6 months. Its strike price is the maximum price over the life of the option; this means: its payoff in 6 months is max(0, Smax – ST). No dividend payments during the 6 months. Use a 2-step CRR binomial model to price this option.

Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate...

Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate on 1-year government bonds is 4.4% in the United States and 7.2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...

The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that any period rates less than a year can be interpolated (i.e. if you invested for 6 months then you would receive 4% in the US). The spot quote is €0.80/$ while the 3-month forward quote is €0.7994/$. You can borrow either $1,000,000 or €800,000. According to IRP, is the forward quote correct? If not, what should it be? If the forward quote is not...

The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that...

The annualized US risk-free rate is 8% and the Germany risk-free rate is 5%. Assume that any period rates less than a year can be interpolated (i.e. if you invested for 6 months then you would receive 4% in the US). The spot quote is €0.80/$ while the 3-month forward quote is €0.7994/$.You can borrow either $1,000,000 or €800,000. According to IRP, is the forward quote correct? If not, what should it be? If the forward quote is not correct,...

The spot price of an investment asset is $55 and the risk-free rate for all maturities...

The spot price of an investment asset is $55 and the risk-free rate for all maturities (with continuous compounding) is 4%, and the asset provides an income of $3 at the end of each year. (12pts.) a. What is the two year forward price? (6pts.) b. What is the value of this two-year forward contract with a delivery price of $40? (6pts.)

The spot price of an investment asset is $30 and the risk-free rate for all maturities...

The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? (Hint: First find the PV of $2 income at year 1 and year 2 using 10% rate and subtract it from spot price.) $19.67 $35.84 $45.15 $40.50

The spot price of an investment asset is $30 and the risk-free rate for all maturities...

The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides a dividend income of $2 at the end of the first year and at the end of the second year. What is the three-year futures price? (Hint: you would first need to find the PV of year 1 and year 2 incomes and then subtract it from the spot price.) $19.67 $35.84 $45.15 $40.50

Subjects