Suppose you buy a Merck put for$2.50 which matures in Septemberwith a strike price of $50. Merck iscurrently trading at $51.75. If thestock price of Merck falls to $46, therate of return of your put option is:O 60%O 70%Ⓒ 120%10%

gain for put = strike price - stock price = 50-46 =4

Answered: stock price of Merck falls to $46, rate…

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stock price of Merck falls to $46, rate of return of your put option is

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 4P: Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call...

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Suppose you buy a Merck put for
$2.50 which matures in September
with a strike price of $50. Merck is
currently trading at $51.75. If the
stock price of Merck falls to $46, the
rate of return of your put option is:
O 60%
O 70%
Ⓒ 120%
10%

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