Rachel is considering an investment in Yonan Communications, whose stockcurrently sells for $65. A put option on Yonan’s stock, with an exercise price of $60, has amarket value of $2.90. Meanwhile, a call option on the stock with the same exercise priceand time until expiration has a market value of $9.13. The market believes that at the expirationof the options, the stock price will be $55 or $75 with equal probability.a. What is the premium associated with the put option? The call option?b. If Yonan’s stock price increases to $75, what would be the return to an investor whobought a share of the stock? If the investor bought a call option on the stock? If theinvestor bought a put option on the stock?c. If Yonan’s stock price decreases to $55, what would be the return to an investor whobought a share of the stock? If the investor bought a call option on the stock? If theinvestor bought a put option on the stock?d. If Rachel buys 0.5 share of Yonan Communications and sells one call option on thestock, has she created a riskless hedged investment? What is the total value of herportfolio under each scenario?
Rachel is considering an investment in Yonan Communications, whose stock
currently sells for $65. A put option on Yonan’s stock, with an exercise price of $60, has a
market value of $2.90. Meanwhile, a call option on the stock with the same exercise price
and time until expiration has a market value of $9.13. The market believes that at the expiration
of the options, the stock price will be $55 or $75 with equal probability.
a. What is the premium associated with the put option? The call option?
b. If Yonan’s stock price increases to $75, 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 Yonan’s stock price decreases to $55, 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 Rachel buys 0.5 share of Yonan 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?
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