PRACTICAL MGT. SCIENCE (LL)-W/MINDTAP
6th Edition
ISBN: 9781337610278
Author: WINSTON
Publisher: CENGAGE L
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 2, Problem 24P
a)
Summary Introduction
To determine: The price of the call option.
Call option:
Call option is an arrangement which gives the option buyer the right but does not give the obligation to buy a stock, commodity, bond or any other instrument at a stated price within a particular period. The stock, bond, or commodity is called as the underlying asset.
b)
Summary Introduction
To use: A data table to show how a change in volatility changes the value of the option and give an intuitive explanation for the results.
c)
Summary Introduction
To use: A data table to show how a change in today’s stock price changes the option’s value and give an intuitive explanation for your results.
d)
Summary Introduction
To use: A data table to show how a change in the option’s duration changes the option’s value and give an intuitive explanation for the results.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Assume “Jane” saves $10,000 per year for 10 years starting at age 25. At age 35 she no longer is able to save but leaves her accumulated savings invested until age 65 when she retires. Assume “John” does not begin saving until age 35, but then saves $10,000 per year until age 65 when he also retires. Assume John and Jane invest their entire wealth in the same mutual fund. Who accumulates a larger retirement nest egg? 1. Answer this question by building an Excel spreadsheet that allows you to show the difference in wealth at age 65 assuming an annual rate of return of 8%. Make sure your model allows you to change the assumed rate of return and automatically recalculate the difference in wealth at age 65. 2. At what assumed rate of return are John and Jane’s wealth at age 65 equal? Use “Goal Seek” in order to find this rate of return. 3. Create a graph to clearly show how final wealth for John and Jane depends on the rate of return. Start at 0% and increase the rate of return in…
Dataware is trying to determine whether to give a $10 rebate, cut the price $6, or have no price change on a software product. Currently, 40,000 units of the product are sold each week for $45 apiece. The variable cost of the product is $5. The most likely case appears to be that a $10 rebate will increase sales 30%, and half of all people will claim the rebate. For the price cut, the most likely case is that sales will increase 20%.a. Given all other assumptions, what increase in sales from the rebate would make the rebate and price cut equally desirable?b. Dataware does not really know the increase in sales that will result from a rebate or price cut. However, the company is sure that the rebate will increase sales by between 15% and 40% and that the price cut will increase sales by between 10% and 30%. Perform a sensitivity analysis (two-way data table) that could be used to help determine Dataware’s best decision.
A stock market advisory service offers three investments portfolios for one of its customers. All portfolios have the same investment cost. Portfolio U contains speculative stocks, which aim for capital gain through price appreciation. Portfolio V is made up of stocks of stable companies that pay good dividends overt the long run. Portfolio W comprises stocks with a moderate potential for growth and a moderate yield of dividends.
The customer has enough money to invest in only one of these three portfolios for a period of one year. The net return on investments will depend on whether the economy during the period will be in a stage of inflation, recession, or depression. The net potential gains or losses (in thousands) are calculated as follows:
Chapter 2 Solutions
PRACTICAL MGT. SCIENCE (LL)-W/MINDTAP
Ch. 2.4 - Prob. 1PCh. 2.4 - Prob. 2PCh. 2.4 - Prob. 3PCh. 2.4 - Prob. 4PCh. 2.5 - Prob. 5PCh. 2.5 - Prob. 6PCh. 2.5 - Prob. 7PCh. 2.5 - Prob. 8PCh. 2.5 - Prob. 9PCh. 2.6 - Prob. 10P
Ch. 2.6 - Prob. 11PCh. 2.6 - Prob. 12PCh. 2.6 - Prob. 13PCh. 2.7 - Prob. 14PCh. 2.7 - Prob. 15PCh. 2.7 - Prob. 16PCh. 2.7 - Prob. 17PCh. 2.7 - Prob. 18PCh. 2.7 - Prob. 19PCh. 2 - Julie James is opening a lemonade stand. She...Ch. 2 - Prob. 21PCh. 2 - Prob. 22PCh. 2 - Prob. 23PCh. 2 - Prob. 24PCh. 2 - Prob. 25PCh. 2 - The file P02_26.xlsx lists sales (in millions of...Ch. 2 - Prob. 27PCh. 2 - The file P02_28.xlsx gives the annual sales for...Ch. 2 - Prob. 29PCh. 2 - A company manufacturers a product in the United...Ch. 2 - Prob. 31PCh. 2 - Prob. 32PCh. 2 - Assume the demand for a companys drug Wozac during...Ch. 2 - Prob. 34PCh. 2 - Prob. 35PCh. 2 - Prob. 36PCh. 2 - Prob. 37PCh. 2 - Suppose you are borrowing 25,000 and making...Ch. 2 - You are thinking of starting Peaco, which will...Ch. 2 - Prob. 40PCh. 2 - The file P02_41.xlsx contains the cumulative...Ch. 2 - Prob. 42PCh. 2 - Prob. 43PCh. 2 - The IRR is the discount rate r that makes a...Ch. 2 - A project does not necessarily have a unique IRR....Ch. 2 - Prob. 46PCh. 2 - Prob. 1CCh. 2 - The eTech Company is a fairly recent entry in the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, operations-management and related others by exploring similar questions and additional content below.Similar questions
- In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset. Consider the following simple derivative. A stocks current price is 80 per share. You purchase a derivative whose value to you becomes known a month from now. Specifically, let P be the price of the stock in a month. If P is between 75 and 85, the derivative is worth nothing to you. If P is less than 75, the derivative results in a loss of 100(75-P) dollars to you. (The factor of 100 is because many derivatives involve 100 shares.) If P is greater than 85, the derivative results in a gain of 100(P-85) dollars to you. Assume that the distribution of the change in the stock price from now to a month from now is normally distributed with mean 1 and standard deviation 8. Let EMV be the expected gain/loss from this derivative. It is a weighted average of all the possible losses and gains, weighted by their likelihoods. (Of course, any loss should be expressed as a negative number. For example, a loss of 1500 should be expressed as -1500.) Unfortunately, this is a difficult probability calculation, but EMV can be estimated by an @RISK simulation. Perform this simulation with at least 1000 iterations. What is your best estimate of EMV?arrow_forwardA European put option allows an investor to sell a share of stock at the exercise price on the exercise data. For example, if the exercise price is 48, and the stock price is 45 on the exercise date, the investor can sell the stock for 48 and then immediately buy it back (that is, cover his position) for 45, making 3 profit. But if the stock price on the exercise date is greater than the exercise price, the option is worthless at that date. So for a put, the investor is hoping that the price of the stock decreases. Using the same parameters as in Example 11.7, find a fair price for a European put option. (Note: As discussed in the text, an actual put option is usually for 100 shares.)arrow_forwardThe IRR is the discount rate r that makes a project have an NPV of 0. You can find IRR in Excel with the built-in IRR function, using the syntax =IRR(range of cash flows). However, it can be tricky. In fact, if the IRR is not near 10%, this function might not find an answer, and you would get an error message. Then you must try the syntax =IRR(range of cash flows, guess), where guess" is your best guess for the IRR. It is best to try a range of guesses (say, 90% to 100%). Find the IRR of the project described in Problem 34. 34. Consider a project with the following cash flows: year 1, 400; year 2, 200; year 3, 600; year 4, 900; year 5, 1000; year 6, 250; year 7, 230. Assume a discount rate of 15% per year. a. Find the projects NPV if cash flows occur at the ends of the respective years. b. Find the projects NPV if cash flows occur at the beginnings of the respective years. c. Find the projects NPV if cash flows occur at the middles of the respective years.arrow_forward
- Suppose you begin year 1 with 5000. At the beginning of each year, you put half of your money under a mattress and invest the other half in Whitewater stock. During each year, there is a 40% chance that the Whitewater stock will double, and there is a 60% chance that you will lose half of your investment. To illustrate, if the stock doubles during the first year, you will have 3750 under the mattress and 3750 invested in Whitewater during year 2. You want to estimate your annual return over a 30-year period. If you end with F dollars, your annual return is (F/5000)1/30 1. For example, if you end with 100,000, your annual return is 201/30 1 = 0.105, or 10.5%. Run 1000 replications of an appropriate simulation. Based on the results, you can be 95% certain that your annual return will be between which two values?arrow_forwardSuppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 1000 of C. The current share prices are 42.76, 81.33, and, 58.22, respectively. You plan to hold this portfolio for at least a year. During the coming year, economists have predicted that the national economy will be awful, stable, or great with probabilities 0.2, 0.5, and 0.3. Given the state of the economy, the returns (one-year percentage changes) of the three stocks are independent and normally distributed. However, the means and standard deviations of these returns depend on the state of the economy, as indicated in the file P11_23.xlsx. a. Use @RISK to simulate the value of the portfolio and the portfolio return in the next year. How likely is it that you will have a negative return? How likely is it that you will have a return of at least 25%? b. Suppose you had a crystal ball where you could predict the state of the economy with certainty. The stock returns would still be uncertain, but you would know whether your means and standard deviations come from row 6, 7, or 8 of the P11_23.xlsx file. If you learn, with certainty, that the economy is going to be great in the next year, run the appropriate simulation to answer the same questions as in part a. Repeat this if you learn that the economy is going to be awful. How do these results compare with those in part a?arrow_forwardRework the previous problem for a case in which the one-year warranty requires you to pay for the new device even if failure occurs during the warranty period. Specifically, if the device fails at time t, measured relative to the time it went into use, you must pay 300t for a new device. For example, if the device goes into use at the beginning of April and fails nine months later, at the beginning of January, you must pay 225. The reasoning is that you got 9/12 of the warranty period for use, so you should pay that fraction of the total cost for the next device. As before, how-ever, if the device fails outside the warranty period, you must pay the full 300 cost for a new device.arrow_forward
- The file P02_41.xlsx contains the cumulative number of bits (in trillions) of DRAM (a type of computer memory) produced and the price per bit (in thousandth of a cent). a. Fit a power curve that can be used to show how price per bit drops with increased production. This relationship is known as the learning curve. b. Suppose the cumulative number of bits doubles. Create a prediction for the price per bit. Does the change in the price per bit depend on the current price?arrow_forwardA local finance company quotes a 16 percent interest rate onone-year loans. So, if you borrow $26,000, the interest for the year will be $4,160. Because you must repay a total of $30,160 in one year, the finance company requiresyou to pay $30,160y12, or $2,513.33, per month over the next 12 months. Is this a15 percent loan? What rate would legally have to be quoted? What is the effectiveannual rate?arrow_forwardHome mortgage lenders often charge points on a loan in order to avoid exceeding a legal limit on interest rates or to make their rates appear competitive with those of other lenders. As an example, with a two-point loan, the lender would loan only $98 for each $100 borrowed. The borrower would receive only $98 but would have to make payments just as if he or she had received $100. In this way, the lender can make more money while keeping his or her interest rate lower. Suppose that you receive a loan of $260,000 payable at the end each month for 30 years with an interest rate of 9% compounded monthly, but you have been charged three points. What is the effective interest rate on this home mortgage loan?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,
Practical Management Science
Operations Management
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:Cengage,