An investor with $2,000 to invest feels that a stock price will increase over the next 2 months. The current stock price is $20 and the price of a 2-month call option with a strike of $ 22.50 is $14 What are two alternative Speculation strategies?- If the stock price increase $25, what are the outcome of the two alternative strategies?- If the stock price decrease $20?-

An investor with $2,000 to invest feels that a stock price will increase over the next 2 months. The current stock price is $20 and the price of a 2-month call option with a strike of $ 22.50 is $14 What are two alternative Speculation strategies?- If the stock price increase $25, what are the outcome of the two alternative strategies?- If the stock price decrease $20?-

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 6P: Binomial Model The current price of a stock is 20. In 1 year, the price will be either 26 or 16. The...

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Two investors are evaluating General Electric’s stock for possible purchase. They agree on the expected value of D1, and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 2 years and the other normally holds stocks for 10 years. On the basis of the type of analysis done in this chapter, they should both be willing to pay the same price for General Electric’s stock. True or false? Explain.
What makes for a good investment? Use the approximate yield formula or a financial calculator to rank the following investments according to their expected returns. Buy a stock for $30 a share, hold it for three years, and then sell it for $60 a share (the stock pays annual dividends of $2 a share). Buy a security for $40, hold it for two years, and then sell it for $100 (current income on this security is zero). Buy a one-year, 5 percent note for $1,000 (assume that the note has a $1,000 par value and that it will be held to maturity).
Binomial Model The current price of a stock is 20. In 1 year, the price will be either 26 or 16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of 21 and that expires in 1 year. (Hint: Use daily compounding.)
The stock of Suncor Energy is currently trading for $36 per share. An investor expects the stock price to move up in the next two months, and decided to invest $7, 200 in this stock. If the investor invests all the money in the stock, how much is the profit or loss if the stock price in two months turns out to be i) 40 or ii) 32? If the investor invests all the money in call options with a strike price of $35 and price of the call is $2 per share, how much is the profit or loss if the stock price in two months turns out to be i) 40 or ii) 32?
Lett Incorporated’s stock price is now $50, but it is expected eitherto rise by a factor of 1.5 or to fall by a factor of 0.7 by the end ofthe year. There is a call option on Lett’s stock with a strike price of$55 and an expiration date 1 year from now. What are the stock’spossible prices at the end of the year? ($75 or $35) What is thecall option’s payoff if the stock price goes up? ($20) If the stockprice goes down? ($0) If we sell 1 call option, how many sharesof Lett’s stock must we buy to create a riskless hedged portfolioconsisting of the option position and the stock? (0.5) What is thepayoff of this portfolio? ($17.50) If the annual risk-free rate is 6%,then how much is the riskless portfolio worth today (assumingdaily compounding)? ($16.48) What is the current value of the calloption? ($8.52)
Assume you own a call option on Yahoo stock with a strike price of $40. The option will expire in exactly three months time. If the stock is trading at $55 in three months time, what will be the payoff of the call?
TreeOlivia's stock price is $180 and could halve or double in each six-month period. The interest rate is 12% a year. What is the value of a six-month call option on TreeOlivia with an exercise price of $120? What is the option delta for the six-month call with an exercise of $120? The payoffs of the six-month call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? Assume the exercise price is $120. What is the value of the one-year call option on TreeOlivia with an exercise of $150? (Hint: use the two-step binominal tree) What is the value of the one-year put option on TreeOlivia with an exercise of $150?
Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10 percent nominal rate, and that at expiration of the option in three months, the stock will either be valued at $30 or $70. Show that it is possible to replicate the stock payoff by borrowing and buying a call option.
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months time. If the stock is trading at $55 in three months, what will be the payoff of the call? Note: practice drawing the payoff diagram.
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The current price of a stock is $20, and at the end of one year its price will be either $22 or $18. The annual risk-free rate is 2.0% (use daily compounding with 365 days/year), based on daily compounding. A 1-year call option on the stock, with an exercise price of $19, is available. Based on the binominal model, what is the option's value?(Please Show Work)
A stock price is currently $68 and it is expected that the stock price wilether increase by 10K or fall by 10% over the next two months. The risk-free interest rate is 2.8% per annum with continuous compounding. Consider a two-month call option on the stock with stike 570. What position shares is necessary to hedge a short position in one call option? short sell 1 share short sell 0.35 shares purchase 0.65 shares purchase 0.35 shares short sell 0.65 shares