Option and Value

Please choose from one (1) of the scenarios below. Note: The scenario that you choose in this assignment will be the one (1) with which you continue for Assignment 2.

The current price of a stock is $94, and three-month call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable?

If he wins the bet, money with him will rise to 21 thousand (20 + 1) rupees. If as a result of an increase in money with him, his expected marginal utility of money declines, then the expected marginal utility of extra one thousand rupees to him which is depicted by the rectangle CDFE is less than the extra marginal utility of the previous one thousand (i.e., 20th thousand) rupees which is measured by the rectangle

* With the event “March 20” – Dhawan will miss the original schedule. However, he still receive profit with 3 events analysed in Question 1: pay 50%, pay 30% and pay 20%. We will use the result of question 1 in the event “delay” – He will lose 225,528 INR .

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

4. If Ms. Jameson decided that the option was a better deal, but was concerned with being too committed and reliant on the fortunes of Telstar, she could modify her compensation package to better suit her individual needs. Ms. Jameson would be taking considerable risk by keeping all of her bonus in Telstar for stock options with such a lengthy expiration date and also due to the historical data of Telstar showing that only stock prices reached $35 (the exercise price) only once.

10. Returning the cost factor to 100%, what happens to the value of the option if the risk free interest rate doubles to 8%?

3) Put option to sell British pounds for $1.35/£ expiring in March with a premium of $.0050/£.

This requires that you find the opportunity cost at a point, and not over an interval. There are various ways

The worst outcome for the sale of only 30,000 trips will be options at a exchange rate of 1.48, The expected loss is $541,400. The sale volume is too large and exchange rate is really weak. The gain from sale volume is not enough to cover the loss of weak currency.

Entering the above parameters into the Black Scholes Calculator yields an option price of $3.908 for the ESOs being offered to Sally. Assuming the Black Scholes Option Valuation Model provides the mean valuation from a distribution of equally likely price paths, I would imagine that I would make more than what Black Scholes calculates half the time, and less half the time.

Guthrie could choose for the new product he’s about to make. After determining the EMV for each alternative, option 2 which EMV for $2,600, came out as the highest among the other EMVs. Next, the group was able to identify the possible amount of losses Mr. Guthrie may incur. After getting all the opportunity loss for each alternative, the one with the lowest value of EOL which is $14,300 is determine. The result is once again, option 2. This was made sure by getting the EVwPI and subtracting it to the maximum EMV, thus giving us the EVPI of $14,300 which is equal to the EOL we determined earlier.

The trader has an inflow of $2 in May and an outflow of $5 in September. The $2 is the cash received from the sale of the option. The $5 is the result of the option being exercised. The investor has to buy the stock for $25 in September and sell it to the purchaser of the option for $20.

To compute the value of a stock option the Black-Scholes Option Pricing Model is used. Both call and put option can be calculated with the help of the model. For the accurate application of the Black Scholes Pricing Model it is necessary to be familiar with its assumptions. Black and Scholes specified the following assumptions in their seminal paper (1973). (Ray, 2012)

Combining these two changes together, the investment becomes more valuable. Our computations show a payoff of 0.1459 when the strike price is 0.85 and changing the payment scheme to 1.0 on October 1987 and 1.15 each on August 1988 and April 1989.