Stock Z is currently trading at $27 per share. Its three-month call option has a strike price of $33 per share. Z’s three-month put option has a strike price of $25 per share. Which of the following is CORRECT? Investor should not exercise the call option because it is out of the money Investor should exercise the put option because it is in the money Investor should exercise the call option because it is in the money Investor should let both options expire because they are at the money

Stock Z is currently trading at $27 per share. Its three-month call option has a strike price of $33 per share. Z’s three-month put option has a strike price of $25 per share. Which of the following is CORRECT? Investor should not exercise the call option because it is out of the money Investor should exercise the put option because it is in the money Investor should exercise the call option because it is in the money Investor should let both options expire because they are at the money

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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In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1) What assumptions underlie the OPM? (2) Write out the three equations that constitute the model. (3) According to the OPM, what is the value of a call option with the following characteristics? Stock price = 27.00 Strike price = 25.00 Time to expiration = 6 months = 0.5 years Risk-free rate = 6.0% Stock return standard deviation = 0.49
Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?
You have written a call option on Walmart common stock. The option has an exercise price of $81, and Walmart’s stock currently trades at $79. The option premium is $1.60 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $77 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price increases to $87 at expiration of the option and the option holder exercises the option?
You are attempting to value a call option with an exercise price of $140 and one year to expiration. The underlying stock pays no dividends, its current price is $140, and you believe it has a 50% chance of increasing to $160 and a 50% chance of decreasing to $120. The risk-free rate of interest is 10%. Consider one share of stock and two written calls. Calculate the call option's value using the two-state stock price model. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
You would like to be holding a protective put position on the stock of XYZ Co. to lock in a guaranteed minimum value of $100 at year-end. XYZ currently sells for $100. Over the next year the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on XYZ Co.a. Suppose the desired put option were traded. How much would it cost to purchase?b. What would have been the cost of the protective put portfolio?c. 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 = 100? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.
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.
Neha wrote five call option contracts with a strike price of $33.70 and an option price of $.60 per share. What is the net profit on this investment if the price of the underlying stock is $34.15 per share on the option expiration date? Ignore trading costs and taxes.
A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $45, and writing a 6-month call option with exercise price $55. On the basis of the volatility of the stock, you calculate that for a strike price of $45 and expiration of 6 months, N(d1) = .60, whereas for the exercise price of $55, N(d1) = .35.a. What will be the gain or loss on the collar if the stock price increases by $1?b. What happens to the delta of the portfolio if the stock price becomes very large?c. What happens to the delta of the portfolio if the stock price becomes very small?
Consider a stock priced at $33 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 35 and a time to expiration of six months. The calls are priced at $2.39 and the puts cost $2.05. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Suppose the investor constructed a covered call. If the transaction is closed out when the option has three months to go and the stock price is at $39, what is the investor's profit?
Suppose that call options on ExxonMobil stock with time to expiration 6 months and strike price $87 are selling at an implied volatility of 27%. ExxonMobil stock price is $87 per share, and the risk-free rate is 6%. Required: If you believe the true volatility of the stock is 31%, would you want to buy or sell call options? Now you want to hedge your option position against changes in the stock price. How many shares of stock will you hold for each option contract purchased or sold?
The current price of a stock is $34, and the annual risk-free rate is 3%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.12. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Do not round intermediate calculations. Round your answer to the nearest cent.

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		Investor should not exercise the call option because it is out of the money
		Investor should exercise the put option because it is in the money
		Investor should exercise the call option because it is in the money
		Investor should let both options expire because they are at the money