Suppose a stock is currently priced at $100 a share, and in one period it will...

Suppose a stock is currently priced at $100 a share, and in one period it will either increase or decrease by 10% (to $110 or $90). The stock does not pay dividends. The riskless rate for borrowing and lending over the period is 4 percent. There exist exchange-traded European call and put options on the stock with one period to expiration.

e) How would you answers above change if the if the riskless interest rate remained 4%, but the stock prices became more volatile, and in one period the stock price will either increase or decrease by 15% (to $115 or $85).? EXPLAIN. (4 points)

Expert Solution

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

Strike Price is taken as 100.

a. 10%

call

put

e. 15%

call

put

jeff jeffy answered 1 year ago

Suppose a stock is currently priced at $50 a share, and in one period, it will...

Suppose a stock is currently priced at $50 a share, and in one period, it will be worth either $45 or $55. There is European PUT options on the stock with one period to expiration and an exercise price of $50. The riskless interest rate over the period is 4 percent. Call options do not exist. a) Create a riskless portfolio and show that it is riskless. b) Calculate the current equilibrium put price, current intrinsic value and current time...

YouClone Company’s stock is currently priced at $100. Every period it will go up by $1...

YouClone Company’s stock is currently priced at $100. Every period it will go up by $1 with probability 40%, stay the same with probability 25%, and down by $1 with probability 35%. Consider an option to buy stock in the next 10 days at a cost of $102. Create a spreadsheet in Excel to calculate the value of such an option.

RTF stock is currently priced at $37.13 a share. The only options on this stock are...

RTF stock is currently priced at $37.13 a share. The only options on this stock are the March $45 call option, which is priced at $1.72, and the March $45 put which is priced at $7.99. Flo would like the option to purchase 300 shares of RTF should the price suddenly rise as she expects. Her main concern is that the price will double after hours and she will miss out on some potential profits. She also realizes the stock...

A share of stock is currently priced at $20 and will change with equal likelihood to...

A share of stock is currently priced at $20 and will change with equal likelihood to either $40 or $10. A call option with a $20 exercise price is available on the stock. The interest rate is zero. Which of the following positions will provide (approximately) the same payoffs as the option? Buy 0.667 shares and lend $6.67 Buy 0.667 shares and borrow $6.67 Buy 0.5 shares Sell 0.667 shares and borrow $0.667

Stock in Cheezy-Poofs Manufacturing is currently priced at $45 per share. A call option with a...

Stock in Cheezy-Poofs Manufacturing is currently priced at $45 per share. A call option with a $48 strike and 90 days to maturity is quoted at $1.50. Compare the percentage gains or losses from a $70,000 investment in the stock versus a $70,000 investment in the options (e.g., $70,000 worth of options) if, in 90 days, the stock price is $40; if the stock price is $50; and if the stock price is $60.

Hedging with a put option Suppose that an investor owns one share of ABC stock currently...

Hedging with a put option Suppose that an investor owns one share of ABC stock currently priced at $30. The investor is worried about the possibility of a drop in share price over the next three months and is contemplating purchasing put options to hedge this risk. The put option is having a strike of $30 and premium of $1.50. Compute the profit of a a. un-hedged position if the stock price in three months is $25 b. *un-hedged position...

A stock is currently priced at $100. Over each of the next two three month periods...

A stock is currently priced at $100. Over each of the next two three month periods it is expected to increase by 10% or fall by 10%. Consider a six month call option with a strike of $95. The risk free rate is 8% per annum. What is the risk neutral probability p? MC Options: A. 0.601 B. 0.399 C. 0.65 D. 0.55 What is the call price? MC Options: A. 10.87 B. 11.55 C. 9.00 D. 8.60

The price of a stock is currently $100 per share. The premium on a European put...

The price of a stock is currently $100 per share. The premium on a European put on this share at exercise price $100 (“on the money”) is $5 per share. a. Suppose an investor purchases this stock and buys a put option for each share she buys. Draw the profit “profile” (profits that would result from every possible stock price outcome by the expiration date of the option). Explain. b. Compare this pattern with the pattern that results from buying...

A stock price is currently priced at £100. Over each of the next two three-month periods...

A stock price is currently priced at £100. Over each of the next two three-month periods it is expected to down by 7% or go up by 8%. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of £95? If possible, please provide a detailed step by step as I would like to fully comprehend it rather than just copying it. Thank you :)

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...

Question