Question

In: Finance

The price of Strawberry Farms Inc. (SFI) stock today is $25.65. Your broker tells you that...

The price of Strawberry Farms Inc. (SFI) stock today is $25.65. Your broker tells you that you could buy/sell a European call option on SFI with a strike price of $26 and 11 month until maturity for $5.00. Your research indicates that the variance of SFI’s stock returns is 0.33 and you know that the continuously compounded risk-free rate is 5%. Would you be willing to buy such an option for the price quoted by your broker (i.e., $5.00)? Assume SFI does not pay any dividends. Round d1 and d2 to the nearest values in the cumulative normal distribution table (you find such a table in your textbook or under “Resources” on the course website). No interpolation of N(d) is required.

Would you be willing to buy such an option for the price quoted by your broker (i.e., $5.00)?

Select one:

Yes, the call option is worth more than $5

Yes, the call option is worth less than $5

No, the call option is worth less than $5

No, the call option is worth more than $5

Indifferent, the option is worth exactly $5

Solutions

Expert Solution

Yes, the call option is worth more than $5


Related Solutions

Your broker correctly tells you that your portfolio's average annual rate of return for the past...
Your broker correctly tells you that your portfolio's average annual rate of return for the past two years is 10.0%. You know the portfolio value today of $34,300 is $1,700 less than when you started the account two years ago. What was the portfolio's value one year ago? a. $23,476       b. 828,406       c. $31,247       d. $25,824       e. $21,342 2. A savings account was established with $36,000 exactly 7 years ago. The account earns 4.3% compounded annually. Otherwise, the account has...
Your broker correctly tells you that your portfolio's average annual rate of return for the past...
Your broker correctly tells you that your portfolio's average annual rate of return for the past two years is 10.0%. You know the portfolio value today of $34,300 is $1,700 less than when you started the account two years ago. What was the portfolio's value one year ago? a. $23,476       b. 828,406       c. $31,247       d. $25,824       e. $21,342 MUST USE TIME VALUE OF MONEY FORMULAS OR "BA II PLUS CALCULATOR" IN ORDER TO SOLVE / EXCEL NOT ALLOWED
Your broker correctly tells you that your portfolio's average annual rate of return for the past...
Your broker correctly tells you that your portfolio's average annual rate of return for the past two years is 10.0%. You know the portfolio value today of $34,300 is $1,700 less than when you started the account two years ago. What was the portfolio's value one year ago? a. $23,476       b. 828,406       c. $31,247       d. $25,824       e. $21,342
Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend...
Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend which is expected to grow annually at 8 percent. If you want to earn 12 percent on your funds, is this a good buy? (ii) Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to grow rapidly for the next four years at 20 percent. Thus the dividend payments will be        Year      Dividend          1        $1.20          2         1.44          3         1.73          4         2.07 After this...
Your broker called earlier today and offered you the opportunity to invest in a security. As...
Your broker called earlier today and offered you the opportunity to invest in a security. As a friend, he suggested that you compare the current, or present value, cost of the security and the discounted value of its expected future cash flows before deciding whether or not to invest. The decision rule that should be used to decide whether or not to invest should be:
On January 1, you tell your broker to sell short 500 shares of Apple Inc. stock...
On January 1, you tell your broker to sell short 500 shares of Apple Inc. stock at a price of $200 per share. You use $70,000cash to serve as a margin. (a)How high can the stock price go before you get a margin call if the maintenance margin is 50%? (b)Assume that on April 1, a dividend of $5 per share was paid. On May 1, you covered the short sale by buying the stock at a price of $150...
Suppose you are a stock broker for WillyP Financial. Your client bought a share of stock...
Suppose you are a stock broker for WillyP Financial. Your client bought a share of stock of Intel at $60 and a share of stock Microsoft at $115. A year later, after your client received a $5 dividend from Intel and $3 from Microsoft, he sold the stock Intel at $55 per share and Microsoft $125. What are the expected after tax returns for your client if your client is (Keep your answer to only two decimals) (a) a church...
You will be willing to sell the stock if the price is at least 3% higher than the current price. What type of order do you want to place with your broker?
You want to sell a stock but you believe the current price of this stock is too low. You will be willing to sell the stock if the price is at least 3% higher than the current price. What type of order do you want to place with your broker?limit buy orderlimit sell ordermarket buy ordermarket sell order
Question I: Your stock analyst tells you that a stock will go to $40 with probability of 30%,
3. Answer both questions. Question I: Your stock analyst tells you that a stock will go to $40 with probability of 30%, the stock will go to $50 with probability of 50% and will go to $60 with probability of 20%. Find the mean (expected value) and variance for the stock price. Question II: Your simple stock portfolio consists of stock X and stock Y. 80% of your portfolio is made up of stock X and 20% is made up...
Your broker offers to sell you some shares of FFC a common stock that paid a...
Your broker offers to sell you some shares of FFC a common stock that paid a dividend of Rs. 2 yesterday. FFC dividend is expected to grow at 5% per year for the next 3 years, and, if you buy the stock, you planned to hold it for 3 years and then sell it. The appropriate discount rate is 12 percent. a. Find the expected dividend for each of the next 3 years; that is, calculate D₁, D₂, and D₃....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT