Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
OPTIONS Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan’s stock, with an exercise price of $55, has a market value of $3.06. Meanwhile, a call option on the stock with the same exercise price and time until expiration has a market value of $9.29. The market believes that at the expiration of the options, the stock price will be $50 or $70 with equal probability.
- a. What is the premium associated with the put option? The call option?
- b. If Morgan’s stock price increases to $70, what would be the return to an investor who bought a share of the stock? If the investor bought a call option on the stock? If the investor bought a put option on the stock?
- c. If Morgan’s stock price decreases to $50, what would be the return to an investor who bought a share of the stock? If the investor bought a call option on the stock? If the investor bought a put option on the stock?
- d. If Audrey buys 0.6 share of Morgan Communications and sells one call option on the stock, has she created a riskless hedged investment? What is the total value of her portfolio under each scenario?
- e. If Audrey buys 0.75 share of Morgan Communications and sells one call option on the stock, has she created a riskless hedged investment? What is the total value of her portfolio under each scenario?
a.
To determine: The premium related with the call and put option.
Introduction:
Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date. There are two types of options, which are as follows:
- Call option
- Put option
Given information:
Person A has invested in the M Company. The companyās stock price is $60. The put option has an exercise price is $55 and the market value is $3.06. Even the call option has the same exercise price and market value is $9.29 until the time of expiry. The stock price might be $50 or $70 with equal chance.
The formula to compute the exercise value is as follows:
Compute the current exercise value of put option:
The table below shows the Excel formula to calculate the current exercise value of put option:
The table below shows the calculated values of the current exercise value of put option:
b.
To determine: The return to an investor who own stock, buy call option, and buy put option.
Introduction:
An option where the investor buys an asset called call option and an option where the investor sells an asset called put option.
c.
To determine: The return to an investor who own stock, buy call option, and buy put option.
d.
To determine: The total value of portfolio of Person A in each scenario.
e.
To determine: The total value of portfolio of Person A in each scenario.
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