of directors of X Ltd has decided to grant at-the-money European call options on the company’s stock to its CEO, which is currently trading at $50 per share. The stock pays no dividends. The options will expire in 4 years, and the standard deviation of the returns on the stock is 55%. Treasury bills that mature in 4 years currently yield a continuously compounded interest rate of 5%. Compute the price of option using excel and share the formula template.

of directors of X Ltd has decided to grant at-the-money European call options on the company’s stock to its CEO, which is currently trading at $50 per share. The stock pays no dividends. The options will expire in 4 years, and the standard deviation of the returns on the stock is 55%. Treasury bills that mature in 4 years currently yield a continuously compounded interest rate of 5%. Compute the price of option using excel and share the formula template.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 14P

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Similar questions

The board of directors has just granted Mr. Levin at-the-money European call options on the company’s stock., which is currently trading at $50 per share. The stock pays no dividends. The options will expire in 4 years, and the standard deviation of the returns on the stock is 55%. Treasury bills that mature in 4 years currently yield a continuously compounded interest rate of 7%. Use the Black-Scholes model to calculate the value of the stock option. Use excel and share the formula template.
The CEO of SubShack was granted 100,000 options. The stock price at the time of the granting of the options was $35 and the options have an exercise price of $40. The risk free rate was 3% and the options expire in 5 years. The variance on the stock is .06, or 6.0% What is the value of the options contract (use Black Scholes formula and show all formulas and steps for d1, d2, N(d1), N(d2) and the continuous discount rate)? If he had negotiated a larger salary and only 10,000 options, what would be the value of the options contract?
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $210 at year-end. XYZ currently sells for $210. Over the next year, the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio?
Your company needs funds for expansion and decides to issue a 4-year convertible bond. The stock price currently is $32 and your banker recommends a 25% conversion premium over the current stock price. Using option models the total option value of the convertible is found to be $92 per $1,000 face amount of bond. The company’s current cost of regular 5-year debt is 3%, assuming semi-annual interest payments. The stock does not pay a dividend. What is the option value for each option embedded in the convertible bond? $3.00 $32.00 $2.28 $3.68 What amount of debt value needs to be embedded in the security so that the convertible bond trades at a par price of $1,000? $908 $92 $32 $1,000.00 What coupon will result in the convertible bond trading at par, i.e. at a $1,000 sale price? The coupon will be paid semi-annually. 00% 54% 4% 0%
OneChicago has just introduced a new single stock futures contract on the stock of Brandex, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 3% per year. Required: a. If Brandex stock now sells at $150 per share, what should the futures price be? (Round your answer to 2 decimal places.) b. Brandex stock now sells at $150 per share. If the Brandex stock price drops by 2.0%, what will be the new futures price and the change in the investor's margin account? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) c. Brandex stock now sells at $150 per share. If the margin on the contract is $20,000, what is the percentage return on the investor's position, if the Brandex stock price drops by 2.0%? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $99.00 and expires in 85 days. The current price of Up stock is $122.83, and the stock has a standard deviation of 35% per year. The risk-free interest rate is 6.95% per year. Up stock pays no dividends. Use a 365-day year. a. Using the Black-Scholes formula, compute the price of the call. b. Use put-call parity to compute the price of the put with the same strike and expiration date. (Note:Make sure to round all intermediate calculations to at least five decimal places.)
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You are considering a position as the director of finance in a company listed on the Lusaka Securities Exchange Plc. Since the firm is still new, the salary is not that great but your package will include call options on 5,000 shares of the company. The shares are currently selling for K5 per share. The call options granted to you if you accept the job have an exercise price of K5 and expire in three years. The call options cannot be exercised before maturity. The stock volatility is 28% and the three-year risk free rate is 3.6%.A call with a strike price of K30 costs K3. Required: Calculate the value of the call option.
Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but would prefer to put off the sale until next year for tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike of $45 are selling at $2, and January puts with a strike price of $35 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at: (a) $30, (b) $40, or (c) $50? Compare these proceeds to what you would realize if you simply continued to hold the shares.
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $105 at year-end. XYZ currently sells for $105. Over the next year, the stock price will increase by 9% or decrease by 9%. The T-bill rate is 7%. Unfortunately, no put options are traded on XYZ Company. Required: Suppose the desired put option were traded. How much would it cost to purchase? What would have been the cost of the protective put portfolio? What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 105? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.
The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 6 months. The price of a 6-month put option with an exercise price of $40 is $8.49. Required: If the semiannual risk-free interest rate is 3%, what must be the price of a 6-month call option on C.A.L.L. stock at an exercise price of $40 if it is at the money? (The stock pays no dividends.) What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement? What is the most money you can make on this position? How far can the stock price move in either direction before you lose money? How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? What is the net cost of establishing that position now?
Your company needs funds for expansion and decides to issue a 4-year convertible bond. The stock price currently is $32 and your banker recommends a 25% conversion premium over the current stock price. Using option models the total option value of the convertible is found to be $92 per $1,000 face amount of bond. The company’s current cost of regular 5-year debt is 3%, assuming semi-annual interest payments. The stock does not pay a dividend. How many shares will each $1,000 bond convert? 25 40 20 32 What is the exercise or conversion price of each option of stock embedded in the convertible? $25 $40 $48 $50 How many stock call options are embedded in each $1,000 convertible bond? 25 40 50 20 What is the option value for each option embedded in the convertible bond? $3.00 $32.00 $2.28 $3.68 What amount of debt value needs to be embedded in the security so that the convertible bond trades at a par price of $1,000? $908 $92 $32 $1,000.00 What…