EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 20, Problem 28P
Suppose the S&P 500 is at 900, and it will pay a dividend of $30 at the end of the year. Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what is the lowest possible strike price it could have?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
C. Draw a graph of the SML and locate the projects (A) and (B) on the graph.
5. Effective Annual Yield (EAY) and Effective Annual Rate (EAR)
A. You plan to invest $1,000 for one year and you have the opportunity to invest it at a
12 percent APR, compounded monthly. Alternatively, you could invest the funds at an
annual rate of 12.3 percent compounded semiannually. What is the EAY of each
alternative? (Hint: You need to carry your answer to at least the fourth decimal place.)
Which investment should be chosen?
2
Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro.
What arbitrage opportunity exists?
Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)
You are considering a European put option and a European call option on ABC Ltd and have available the following information. The put option with an exercise price of $15 and time to maturity of 60 days is priced at $2.00. The call option with the same exercise price and time to maturity is priced at $3.00. The underlying asset price is $15. The risk-free rate is 2% per 60 days. Could an arbitrage profit be earned? If so, how much the arbitrage profit is? Show your works (Hint: use discrete put-call parity equation and consider two scenarios for stock price at maturity of the options: $10 or $20).
Chapter 20 Solutions
EBK CORPORATE FINANCE
Ch. 20.1 - What is the difference between an American option...Ch. 20.1 - Does the holder of an option have to exercise it?Ch. 20.1 - Prob. 3CCCh. 20.2 - What is a straddle?Ch. 20.2 - Explain how you can use put options to create...Ch. 20.3 - Explain put-call parity.Ch. 20.3 - If a put option trades at a higher price from the...Ch. 20.4 - What is the intrinsic value of an option?Ch. 20.4 - Can a European option with a later exercise date...Ch. 20.4 - How does the volatility of a stock affect the...
Ch. 20.5 - Is it ever optimal to exercise an American call on...Ch. 20.5 - When might it be optimal to exercise an American...Ch. 20.5 - Prob. 3CCCh. 20.6 - Explain how equity can be viewed as a call option...Ch. 20.6 - Explain how debt can be viewed as an option...Ch. 20 - Explain the meanings of the following financial...Ch. 20 - What is the difference between a European option...Ch. 20 - Below is an option quote on IBM from the CBOE Web...Ch. 20 - Prob. 4PCh. 20 - Prob. 5PCh. 20 - You own a call option on Intuit stock with a...Ch. 20 - Assume that you have shorted the call option in...Ch. 20 - You own a put option on Ford stock with a strike...Ch. 20 - Assume that you have shorted the put option in...Ch. 20 - What position has more downside exposure: a short...Ch. 20 - Consider the October 2015 IBM call and put options...Ch. 20 - You are long both a call and a put on the same...Ch. 20 - You are long two calls on the same share of stock...Ch. 20 - A forward contract is a contract to purchase an...Ch. 20 - You own a share of Costco stock. You are worried...Ch. 20 - Dynamic Energy Systems stock is currently trading...Ch. 20 - You happen to be checking the newspaper and notice...Ch. 20 - In mid-February 2016, European-style options on...Ch. 20 - Suppose Amazon stock is trading for 500 per share,...Ch. 20 - Consider the data for IBM options in Problem 3....Ch. 20 - You are watching the option quotes for your...Ch. 20 - Explain why an American call option on a...Ch. 20 - Consider an American put option on XAL stock with...Ch. 20 - The stock of Harford Inc. is about to pay a 0.30...Ch. 20 - Suppose the SP 500 is at 900, and a one-year...Ch. 20 - Suppose the SP 500 is at 900, and it will pay a...Ch. 20 - Prob. 29PCh. 20 - Suppose that in July 2009, Google were to issue 96...
Additional Business Textbook Solutions
Find more solutions based on key concepts
The meaning of intrinsic value of option. Introduction: Option is a contract to purchase a financial asset from...
Corporate Finance
Ratio that measures a firm’s degree of indebtedness and ratio that assesses a firm’s ability to service debts. ...
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
The benefits of risk, costs and risk of aggressive funding strategy and of a conservatinve funding strategy.
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
What is a beta? How is it used to calculate r, the investor’s required rate of return?
Foundations of Finance (9th Edition) (Pearson Series in Finance)
(Future and present value using a calculator) In 2016 Bill Gates was worth about $82 billion. Let’s see what Bi...
Foundations Of Finance
(Record inventory transactions in the periodic system) Wexton Technologies began the year with inventory of 560...
Financial Accounting (11th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Modigliani-Miller Theorem I. 7. Options A. How does the price of a call option respond to the following changes, other things equal? Does the price go up or down? Explain briefly the intuition for your answer. (i). Exercise price rises. (ii). Volatility of stock price rises. 3arrow_forwardA European-style put option that expires two periods from now has an exercise price of $125. The per-period risk-free rate in the economy is 5.4%. The underlying asset currently sells for $107.50 and will either go up in value by 12% or down by 10%. How much should the put option sell for right now? Round your answer to the nearest penny.arrow_forward1. Suppose that, in each period, the cost of a security either goes up by a factor of u = 2 or down by a factor d = 1/2. Assume the initial price of the security is $100 and that the interest rate r is 0. c) Assuming the strike price of a European call option on this security is $90, compute the possible payoffs of the call option given that the option expires in two periods.arrow_forward
- Consider a European call option and a European put option that have the same underlying stock, the same strike price K = 40, and the same expiration date 6 months from now. The current stock price is $45. a) Suppose the annualized risk-free rate r = 2%, what is the difference between the call premium and the put premium implied by no-arbitrage? b) Suppose the annualized risk-free borrowing rate = 4%, and the annualized risk-free lending rate = 2%. Find the maximum and minimum difference between the call premium and the put premium, i.e., C − P such that there is no arbitrage opportunities.arrow_forwardThe price of one-year and two-year European put option with strike price $100 are $10 and $4 respectively. The term-structure of interest rate is 10%. Is there any arbitrage opportunity? If yes, perform the arbitrage.arrow_forwardConsider a European call option struck "at-the-money", meaning the strike price equals current stock price. There is one year until expiration and the risk-free annual interest rate is r = 0.06. We define the call option's "delta" as aCE(S,t) A as Is it possible to determine whether or not the call option's delta is greater than or less than 0.5?arrow_forward
- Which of the following statements is (are) TRUE? Select one or more alternatives: If the AUD trades at a forward premium relative to the NZD, we would expect the NZD risk-free rate to be higher than the AUD risk-free rate. If the 1-year AUD risk-free rate is higher than the 1-year NZD risk-free rate then the value of the NZD will rise relative to the AUD over the next year. Assuming it doesn't hedge, a New Zealand based company importing Australian products will suffer if the value of the AUD rises relative to the NZD. □ If covered interest rate parity holds, then uncovered interest rate parity must also hold.arrow_forwardThe following is the spot and forward rates of dollar against Euro. Spot 30-day forward Euro/$ 0.85 0.90 You sign a contract for selling John Deere with the amount of 1 billion euros that will be delivered in 30days. You expect the 30day later the spot rates of dollar to be 0.75 with 50% chance and 0.95 with 50%. What is the expected dollar amount if no forward has been used? As a risk-neutral person, is it a good idea to use the forward?arrow_forwardA European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55. a. Is there an arbitrage opportunity? b. Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists. c. Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity. Use at least four decimal places for those questions that require a numerical answer.arrow_forward
- Suppose you pay 10 to buy a European (K = 100, t = 2) call option on a given security. Assuming a continuously compounded nominal annual interest rate of 6 percent, find the present value of your return from this investment if the price of the security at time 2 is (a) 110; (b) 98.arrow_forwardYou buy a European call option priced at $0.025/€ on €225,000 at a strike price of $1.50/€. If at maturity, the observed price is $1.60/€, what is the total net cash flow involved at the end of this investment whether you exercise or do not exercise this option?arrow_forwardIf the spot price is 86.5BDT/US$ and the 3 months European put option exercise price is 87.75BDT/US$. If our interest rate is 9% and U.S. interest rate is 3% and given the volatility σ is 18.1%, what should be the price of this European put option?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
What is Risk Management? | Risk Management process; Author: Educationleaves;https://www.youtube.com/watch?v=IP-E75FGFkU;License: Standard youtube license