What is a price ceiling? Give and describe an example of a price ceiling in real world applications.

The price of a European call that expires in six months and has a strike price of $82.50 is $5.5. The underlying stock price is $79.75. The interest rates are 10% per annum for all maturities.

(a) What is the price of a European put option that expires in six months and has a strike price of $82.50?

(b) Explain carefully the arbitrage opportunities if the European put price is $4. Describe the arbitrage strategies. (How to proceed with the arbitrage transaction?)

(c) Show the payoff table for the arbitrage strategies if ST < K or ST > K.

(d) Calculate the arbitrage profit now (at t=0). (Please calculate the answer accurate to the fourth decimal place.)

“Price ceiling is the maximum legal price that can be charged in a
market ”. Explain why a “price-ceiling policy” can reduce
social welfare? Explain the implications
the business?

12.   The initial offer price for the target firm is defined as:

a.   The minimum price.

b.   The present value of the minimum price plus some fraction of the present value of net synergy.

c.   The present value of net synergy plus the current market value of the target firm.

d.   The maximum price less the minimum price.

e.   The maximum price less the present value of net synergy.

If the government removes a binding price floor from a market, then the price paid by buyers will

Under rent control, bribery is a mechanism to

The volatility of a share price affects the options price, the higher the volatility, the higher is the options price. There are many ways of computing volatility, but a popular method is to find the coefficient of variation of daily closing stock prices for a year. Calculate the volatility of the following share prices using daily closing price data from 1 Jan 2019 to 31 Dec 2019 in ASX from Yahoo Finance. BHP (BHP Group Limited) CSL (CSL Limited) CBA (Commonwealth Bank Limited) MYR (Myer Holdings Limited) (Please do not write equations in the solution. Embed Excel screenshots in your answers so that the marker can identify the procedures you have adopted to find volatility. Express volatility as %).

A non – dividend – paying stock with a current price of $52, the strike price is $50, the risk free interest rate is 12% pa, the volatility is 30% pa, and the time to maturity is 3 months?

a) Calculate the price of a call option on this stock

b) What is the price of a put option price on this stock?

c) Is the put-call parity of these options hold?

(4 + 4 + 2 = 10 marks)

Please provide step by step answers, thank you!

1. Given that the price index in the previous (month) was 1.05 and the expected price in the previous period was 1.00.

a.) What would be the current expected price "Range" if adaptive expectations were used?

1. A Whatnot pays the difference between the final price and the minimum price of a stock over the period of the asset. For example, if the price of a stock is 200, 220, and 234 in the previous periods (here periods 0, 1, and 2), the minimum price is 200, the final price is 234, and the asset would pay 234-200=34.. If the price path is 200, 220, 200, the minimum price is 200, the final price is 200, and the asset would pay 0.

So given all this, you have a Whatnot that expires in 2 periods where the stock price in period 0 is 60. The stock either moves up with u=1.2, or down with d=1/1.2. The interest rate is 5 percent. What is the value of your asset today in period 0? Please include all work with steps and explanations.

You are about to price a call option that has a strike price of $30 and has a maturity of 9-months. You know the current risk-free rate for all periods up to a year is 4.95% with continuous compounding, the current stock price is $28.75, and the stock’s volatility is 25%. Use CRR approach for u & d when needed.

What is the value of this European put option using a 4-step binomial tree?