INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 20, Problem 7PS
a.
Summary Introduction
To calculate: The Price of 3 month put option on P.U.T.T stock at an exercise price of $100 if the risk interest rate is 10% p.a.
Introduction:
Put-call parity: The put-call parity equation is used to calculate the put price. This equation says that the call option and exercise price is equal to the stock value and put option.
b.
Summary Introduction
To explain: Simple strategy of option for the future movement of stock prices and how far it will move to make a profit on initial investment.
Introduction: The social and economics factor affects the stock prices. Put-call parity is used to determine the value of the call option.
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The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a 3-month call option at an exercise price of $100 is $10.a. If the risk-free interest rate is 10% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.)b. What would be a simple options strategy to exploit your conviction about the stock price’s future movements? How far would it have to move in either direction for you to make a profit on your initial investment?
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The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 6 months. The price of a 6-month put option with an exercise price of $40 is $8.49.
Required:
If the semiannual risk-free interest rate is 3%, what must be the price of a 6-month call option on C.A.L.L. stock at an exercise price of $40 if it is at the money? (The stock pays no dividends.)
What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement? What is the most money you can make on this position? How far can the stock price move in either direction before you lose money?
How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? What is the net cost of establishing that position now?
Chapter 20 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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