The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 26% or it falls by 19.3%. Its price now is $43. The interest rate is 0.5% per month. a. What is the value of a one-month call option with an exercise price of $43? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $42? e. What is the option delta of the two-month call over the first one-month period?

The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 26% or it falls by 19.3%. Its price now is $43. The interest rate is 0.5% per month. a. What is the value of a one-month call option with an exercise price of $43? b. What is the option delta? c. The payoffs of the call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? d. What is the value of a two-month call option with an exercise price of $42? e. What is the option delta of the two-month call over the first one-month period?

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 4MC

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