The current price of a stock is $55. In 1 year, the price will be either $50or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expiresin 1 year.a. Find the range of values for the ending stock price and the call option at the option’sexpiration in 1 year.b. Equalize the range of payoffs for the stock and the option.c. Create a riskless hedged investment. What is the value of the portfolio in 1 year?d. What is the cost of the stock in the riskless portfolio?e. What is the present value of the riskless portfolio?f. From your answers in parts d and e, what is the value of the firm’s call option?
The current price of a stock is $55. In 1 year, the price will be either $50or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expiresin 1 year.a. Find the range of values for the ending stock price and the call option at the option’sexpiration in 1 year.b. Equalize the range of payoffs for the stock and the option.c. Create a riskless hedged investment. What is the value of the portfolio in 1 year?d. What is the cost of the stock in the riskless portfolio?e. What is the present value of the riskless portfolio?f. From your answers in parts d and e, what is the value of the firm’s call option?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The current price of a stock is $55. In 1 year, the price will be either $50
or $65. The annual risk-free rate is 5.5%. The stock has an exercise price of $60 and expires
in 1 year.
a. Find the range of values for the ending stock price and the call option at the option’s
expiration in 1 year.
b. Equalize the range of payoffs for the stock and the option.
c. Create a riskless hedged investment. What is the value of the portfolio in 1 year?
d. What is the cost of the stock in the riskless portfolio?
e. What is the
f. From your answers in parts d and e, what is the value of the firm’s call option?
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a. Calculation of range of values for the ending price of stock and call option:
VIEWb. Calculation of range of payoff for option and stock:
VIEWc. Calculation of value of portfolio in one year:
VIEWd. Calculation of cost of the stock in riskless portfolio:
VIEWe. Calculation of present value of riskless portfolio:
VIEWf. Calculation of value of call option:
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