PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 20, Problem 11PS
Summary Introduction
To construct: A payoff position diagram for the scheme
Summary Introduction
To discuss: The set of options offers these payoff.
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Students have asked these similar questions
Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now.
Option
Payoff One Year from Now
1
100% chance of receiving $1,100
2
50% chance of receiving $1,000; 50% chance of receiving $1,200
3
50% chance of receiving $200; 50% chance of receiving $2,000
If Erik is risk averse, which investment will he prefer?
The investor will choose option 1.
The investor will choose option 2.
The investor will choose option 3.
The investor will be indifferent toward these options.
Which kind of stock is most affected by changes in risk aversion?
High-beta stocks
Low-beta stocks
All stocks are affected the same, regardless of beta.
Medium-beta stocks
A rich, friendly, and probably slightly unbalanced benefactor offers you the opportunity to invest $1 million today in two mutually exclusive ways. The payoffs are: $2 million after 1-year, a 100% return; or $300,000 a year forever.
Neither investment is risky, and safe securities are yielding 7%. Which investment should you take? You can’t take both, so the choices are mutually exclusive. Should you want to earn a high percentage, or should you want to be rich?
Applying the net present value method and the internal rate of return method should help to guide you in your decision. And, the present value of a perpetuity is equal to the cash payment divided by the interest rate.
Earn a high percentage.
Be rich.
Monique Gonzales just graduated and was hired by a new cybersecurity firm in Colorado. She needs to set up her retirement plan portfolio. Monique has completed the following payoff table for different investment options and estimated the potential profits that could be realized in one month. Monique can use the Hurwicz Criterion strategy to make her decision.Payoff Table
State of Nature
Alternatives
Good Economy
Fair Economy
Poor Economy
Mutual Fund
1,0001,000
650650
270270
Stock Market
6,5006,500
4,7004,700
3,3003,300
CDs
1,5001,500
850850
710710
Bonds
650650
270270
205205
Step 2 of 2:
What is Monique’s potential payoff based on the the Hurwicz Criterion strategy and an α=0.35α=0.35?
Chapter 20 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 20 - Vocabulary Complete the following passage: A _____...Ch. 20 - Option payoffs Note Figure 20.12 below. Match each...Ch. 20 - Option payoffs Look again at Figure 20.12. It...Ch. 20 - Option payoffs What is a call option worth at...Ch. 20 - Option payoffs The buyer of the call and the...Ch. 20 - Option combinations Suppose that you hold a share...Ch. 20 - Option combinations Dr. Livingstone 1. Presume...Ch. 20 - Option combinations Suppose you buy a one-year...Ch. 20 - Option combinations Suppose that Mr. Colleoni...Ch. 20 - Option combinations Option traders often refer to...
Ch. 20 - Prob. 11PSCh. 20 - Option combinations Discuss briefly the risks and...Ch. 20 - Put-call parity A European call and put option...Ch. 20 - Putcall parity a. If you cant sell a share short,...Ch. 20 - Putcall parity The common stock of Triangular File...Ch. 20 - Put-call parity What is put-call parity and why...Ch. 20 - Putcall parity There is another strategy involving...Ch. 20 - Putcall parity It is possible to buy three-month...Ch. 20 - Putcall parity In April 2017, Facebooks stock...Ch. 20 - Option bounds Pintails stock price is currently...Ch. 20 - Option values How does the price of a call option...Ch. 20 - Option values Respond to the following statements....Ch. 20 - Option values FX Bank has succeeded in hiring ace...Ch. 20 - Option values Is it more valuable to own an option...Ch. 20 - Option values Youve just completed a month-long...Ch. 20 - Option values Table 20.4 lists some prices of...Ch. 20 - Option bounds Problem 21 considered an arbitrage...Ch. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 32PS
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