(a) Is there an arbitrage? Suppose an investment firm sells options. (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? Suppose a start-up company wants to go public. The firm has total costs of $100,000 at datet=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firmwants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of thetotal profits of the firm.) (d) The underwriter suggests an IPO price of $40 per share. Will this IPO be successful,i.e. will there be a positive demand for the shares? Consider an economy with two dates (t=0,1) and at t=1 there are three states. The followingthree stocks are traded:x;=(10,0,30) x2=(0,20,40) x3=(20,20,0)The t=0 prices of these stocks are given as follows(p!, p2, p3)=(12, 14, 8).(a) Is there an arbitrage?Suppose an investment firm sells options.(b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12?(c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23?Suppose a start-up company wants to go public. The firm has total costs of $100,000 at datet=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firmwants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of thetotal profits of the firm.)(d) The underwriter suggests an IPO price of $40 per share. Will this IPO be successful,i.e. will there be a positive demand for the shares?

Given, X1 = (10,0,30) X2 = (0,20,40) X3 = (20,20,0) At (t=0), price (P1,P2,P3)=(12,14,8)

a) Is there an arbitrage? Suppose an investment firm sells options. (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm

a) Is there an arbitrage? Suppose an investment firm sells options. (b) What is the t=0 price (premium) of a call option on stock 2 with exercise price E=12? (c) What is the t=0 price (premium) of a put option on stock 1 with exercise price E=23? Suppose a start-up company wants to go public. The firm has total costs of $100,000 at date t=1 and sales of $120,000 in state 1, $230,000 in state 2, and $140,000 in state 3. The firm wants to issue 1,000 IPO shares. (A share is endowed with a cash flow right of 0.1% of the total profits of the firm

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.1IP

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