(Option Price) Imagine that a rancher would have an income of $100,000 if his county remains...

(Option Price) Imagine that a rancher would have an income of $100,000 if his county remains free from a cattle parasite but only $50,000 if the county is exposed to the parasite. Imagine that a county program to limit the impact of exposure to the parasite would reduce his income to $93,000 if the county remains free of the parasite but increase it to $75,000 if the county is exposed to the parasite. Assume that there is a 25 percent chance of exposure to the parasite and that the rancher’s utility is the natural logarithm of his income. What is the ranchers option price for the county program? You will find it useful to construct a spreadsheet to compute your solutions.

Solutions

Expert Solution

I solved the problem on a paper since its long and complicated. Please see the solution below. Also, I am attaching the calculation excel link. Use the excel along with the solution for better understanding. Please download the excel, if possible, to see the formulas-

Excel link- https://drive.google.com/open?id=14ubZpWE-VXSwz6P54pZDd8X0c01gSUR-

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Find the Black-Scholes price of a six-month call option written on €100,000 with a strike price...

Find the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.0000/€. The current exchange rate is $1.125/€. The U.S. risk-free rate is 2 percent over the period and the euro-zone risk-free rate is 1 percent. The volatility of the underlying asset is 10.5 percent. $0.1309/€ $0.1682/€ $0.1452/€ $0.0016/€

A European call option and put option on a stock both have a strike price of...

A European call option and put option on a stock both have a strike price of $21 and an expiration date in 4 months. The call sells for $2 and the put sells for $1.5. The risk-free rate is 10% per annum for all maturities, and the current stock price is $20. The next dividend is expected in 6 months with the value of $1 per share. (a) describe the meaning of “put-call parity”. [2 marks] (b) Check whether the...

A European call option and put option on a stock both have a strike price of...

A European call option and put option on a stock both have a strike price of $21 and an expiration date in 4 months. The call sells for $2 and the put sells for $1.5. The risk-free rate is 10% per annum for all maturities, and the current stock price is $20. The next dividend is expected in 6 months with the value of $1 per share. (a) In your own words, describe the meaning of “put-call parity”. (b) Check...

. An individual reports $100,000 on his personal income tax return, and is audited. The audit...

. An individual reports $100,000 on his personal income tax return, and is audited. The audit concludes with an assessment alleging that the taxpayer failed to report an additional $30,000 of income. The statute of limitations to assess the taxpayer is three years. True or False.

Imagine you have the option to invest in three different opportunities: A, B and C. Let's...

Imagine you have the option to invest in three different opportunities: A, B and C. Let's also say that you have analyzed the risks and you believe you can classify them as low-risk, medium-risk and high-risk, respectively. Which of these three opportunities would you need to provide the greatest return in order to invest in it? Now let's say the returns of opportunities A and B are highly correlated with the market as a whole but those of opportunity C...

You have written a call option on Walmart common stock. The option has an exercise price...

You have written a call option on Walmart common stock. The option has an exercise price of $88, and Walmart’s stock currently trades at $86. The option premium is $1.30 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $84 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price...

You have purchased a put option on Pfizer common stock. The option has an exercise price...

You have purchased a put option on Pfizer common stock. The option has an exercise price of $52 and Pfizer’s stock currently trades at $54. The option premium is $0.70 per contract. a. What is your net profit on the option if Pfizer’s stock price does not change over the life of the option? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) Net profit $ per share b. What is your...

You have written a call option on Walmart common stock. The option has an exercise price...

You have written a call option on Walmart common stock. The option has an exercise price of $77, and Walmart’s stock currently trades at $75. The option premium is $1.40 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $73 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price...

____ 1. Al single, age 70, and has gross income of $100,000. His deductible expenses are...

____ 1. Al single, age 70, and has gross income of $100,000. His deductible expenses are as follows: Alimony $9,000 Charitable contributions 5,000 Contribution to a traditional IRA 4,000 Medical expenses 11,850 State income taxes 4,000 Expenses paid on rental property 8,000 Unreimbursed moving expenses to a new job in a new city (400 miles away) 1,000 Interest on home mortgage and property taxes on personal residence 8,000 State income tax 9,000 What is Al’s medical deduction? a. $2,300. b....

Consider a capital budgeting project with the following characteristics: Purchase price = $100,000 Net income for...

Consider a capital budgeting project with the following characteristics: Purchase price = $100,000 Net income for the next 3 years is expected to be $30,000, $90,000, and $150,000, respectively. Depreciation expense for the next 3 years will be $5,000, $3,000, and $2,000, respectively. Salvage value = $0 Expected rate of return = 10% The net present value (NPV) of this project is closest to: a. $250,614 b. $175,600 c. $122,878 d. $151,669 e. $369,996 The computation of the terminal cash...

Subjects