Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below.Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock.Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options butno call options. Assume the risk-free rate is rf = 10%.25201510510152025303540-5-10-15Problem 2 Suppose that a stock is currently trading at $60 per share, and the stock price canonly take two possible values one year from now: it can either go up by 25% or down by 20%. Theannual risk-free rate is 4%. Assume that the stock pays no dividends. You are interested in pricingan European put option on this stock. The option has a strike price of $66, and its maturity dateis exactly one year from now.a) What is the payoff on the put option if the stock price goes up by 25%?b) What is the payoff on the put option if the stock price goes down by 20%?c) What is the price of the put option?Problem 3For a two-period binomial model, you are given:• Each period is one year.• The current price for a non-dividend paying stock is $20.• u = 1.2840, where u is one plus the rate of capital gain on the stock per period if the stockprice goes up. • d = 0.8607, where d is one plus the rate of capital loss on the stock per period if the stockprice goes down.• The risk-free interest rate is 5%.Calculate the price of an American call option on the stock with a strike price of $22.

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Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below. Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock. Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options but no call options. Assume the risk-free rate is rf = 10%. 25 20 15 10 5 10 15/20 25 30 35 40 -5 -10 -15

Problem 1 Suggest two different portfolios that produce the payoff diagram as in the graph below. Both portfolios may contain any amount of risk-free borrowing or lending, and the underlying stock. Portfolio 1 may contain call options but no put options. Portfolio 2 may contain put options but no call options. Assume the risk-free rate is rf = 10%. 25 20 15 10 5 10 15/20 25 30 35 40 -5 -10 -15

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

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