Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the 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's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)
Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the 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's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Lett Inc
stock price is now $50,
but it is expected either to rise by a factor of
1.5 or fall by a factor of 0.7 by the end of the
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's
possible prices at the end of the year? ($75
or $35) What is the call option's payoff if the
stock price goes up? ($20) If the stock price
goes down? ($0) If we sell 1 call option, how
many shares of Lett's stock must we buy to
create a riskless hedged portfolio consisting
of the option position and the stock? (0.5)
What is the payoff of this portfolio? ($17.50)
If the annual risk-free rate is 6%, then how
much is the riskless portfolio worth today
(assuming daily compounding)? ($16.48)
What is the current value of the call option?
($8.52)
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