Question

In: Finance

The current futures price of a stock is $15 per share. One month later, when the...

The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%.

  1. What is the value of the risk-free portfolio at the maturity? (1 mark)

Solutions

Expert Solution

Given: Spot Price (S) = $15/sahre

Strike Price (K) = $14.5/share ; Risk free rate = 6% ; Future Price: fu=$16.5/sahre or fd=$14/sahre

Using the Simple Binomial Model to find the price of the Risk-Free Portfolio. This method is based on the concept of creating a risk-free portfolio by having long on stock and short on the option contract. It goes like this:

Therefore, the value of the portfolio comes out to be $11.20 at maturity and $11.1441 at present time.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The current futures price of a stock is $15 per share. One month later, when the...
The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%. What is the value of the risk-free portfolio at time zero? (1 mark)
The current futures price of a stock is $15 per share. One month later, when the...
The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%. What is the cost of futures contract at time zero? (1 mark)
The current futures price of a stock is $15 per share. One month later, when the...
The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%. What is the value of long futures contract (per share) at the option maturity?
The current futures price of a stock is $15 per share. One month later, when the...
The current futures price of a stock is $15 per share. One month later, when the futures option expires, the futures price could have risen to $16.5 per share or declined to $14 per share. The strike price is $14.5. The risk-free rate is 6%. What is the cost of futures contract at time zero? (1 mark)
The current price of Parador Industries stock is $44 per share. Current sales per share are...
The current price of Parador Industries stock is $44 per share. Current sales per share are $21.35, the sales growth rate is 4 percent, and Parador does not pay a dividend. The expected return on Parador stock is 13 percent. a. Calculate the sales per share one year ahead. (Round your answer to 2 decimal places.) b. Calculate the P/S ratio one year ahead. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The current price of one share of a certain stock is 100. The price of a...
The current price of one share of a certain stock is 100. The price of a one-year call option on the stock with a strike price of 105 is 10. The risk-free interest rate is 5.884% and the stock’s dividend yield is 2.02% Mr. John would like to create a synthetic long put option on the stock with a strike price of 105 and one year to maturity, using: Stock Call option Cash Determine the amount of cash and the...
Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock...
Consider a one-year futures contract for 1 share of a dividend paying stock. The current stock price is $50 and the risk-free interest rate is 10% p.a. It is also known that the stock will pay a $3 dividend at the end of year 1. The current settlement price for the futures contract is $51. Set up a strategy for an arbitrage profit. What are the initial and terminal cash flows from the strategy? Assume that investors can short-sell or...
7 A) Suppose you buy stock at a price of $82 per share. Three months later,...
7 A) Suppose you buy stock at a price of $82 per share. Three months later, you sell it for $88. You also received a dividend of $0.50 per share. What is your annualized return on this investment? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) B) You just sold short 950 shares of Wetscope, Inc., a fledgling software firm, at $72 per share. You cover your short when the price hits...
The current stock price for a company is $42 per share, and there are 6 million...
The current stock price for a company is $42 per share, and there are 6 million shares outstanding. This firm also has 230,000 bonds outstanding, which pay interest semiannually. If these bonds have a coupon interest rate of 9%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 7.8%, what is the percent market value of debt for this firm? (Answer to the nearest hundredth of a percent, but do not use a...
The current stock price for a company is $48 per share, and there are 5 million...
The current stock price for a company is $48 per share, and there are 5 million shares outstanding. The beta for this firms stock is 1.2, the risk-free rate is 4.2, and the expected market risk premium is 6.4%. This firm also has 120,000 bonds outstanding, which pay interest semiannually. These bonds have a coupon interest rate of 6%, 10 years to maturity, a face value of $1,000, and an annual yield to maturity of 8.1%. If the corporate tax...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT