Question

In: Finance

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 increases to $28, what’s the profit from the option? e) If the risk free rate is 3%, what’s the option put price?

Expert Solution

The current stock price is $25

The strike price is $24

The current stock price > The strike price. The call option is in the money

a) The intrinsic value of in the money call option = The current stock price - The strike price

The intrinsic value of in the money call option = 25 - 24 = $1

b) The breakeven price of a call option = Strike price + call option premium

The breakeven price = 24 + 2 = $26

c) Payoff = max(St - X, 0)

Payoff = max(St - 24, 0)

Screenshot with formulas

d) St = $28

Profit = max(St - X, 0) - call option premium

Profit = max(28 - 24, 0) - 2

Profit = 4 - 2

Profit = $2 per share

Profit per contract = 2 * 100 = $200

Profit for 10 contracts = $200 * 10 = $2,000

e) P = X e^(-rt) + C - S

P = 24 * e^(-0.03 * 6/12) + 2 - 25

P = $0.6426865505

jeff jeffy answered 1 year ago

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 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 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.

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

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...

An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock...

An investor purchases 300 shares of ABC stock on margin. The current price of ABC stock is $70 per share, the initial margin requirement is 60% and the maintenance margin requirement is 35%. A) What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B) How far can the stock price fall before the investor gets a margin call?

What is the current price for abc Inc. common stock if the stock is expected to...

What is the current price for abc Inc. common stock if the stock is expected to pay a dividend of $1.00 in one year, $1.40 in two years and $1.90 in three years, assuming you will sell the sock in three years for $90.39 (just after you receive the third dividend) and the required rate of return is 8%

What is the current price for ABC inc. common stock if the stock is expected to...

What is the current price for ABC inc. common stock if the stock is expected to pay a dividend of $1.00 in one year, $1.50 in 2 years and $1.70 in three years, assuming you will sell the stock in three years for $90.39 (just after you received the 3rd dividend) and the required rate of return is 8%

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...