The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid. Introduction: Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

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Answer 1

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50per share for months, and you believe it is going to stay in that range for the next 3 months. Theprice of a 3-month put option with an exercise price of $50 is $4.a. If the risk-free interest rate is 10% per year, what must be the price of a 3-month call optionon C.A.L.L. stock at an exercise price of $50 if it is at the money? (The stock pays nodividends.)b. What would be a simple options strategy using a put and a call to exploit your convictionabout the stock price’s future movement? What is the most money you can make on thisposition? How far can the stock price move in either direction before you lose money?c. How can you create a position involving a put, a call, and riskless lending that would havethe same payoff structure as the stock at expiration? What is the net cost of establishing thatposition now?

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?

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?

Answer 2

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Answer 3

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Answer 4

Question

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

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Answer 5

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 6

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

Answer 7

Chapter 20, Problem 8PS

a.

Summary Introduction

To compute: The price of a 3-month call option on C.A.L.L. stock if the exercise price is $50 with a condition that no dividends will be paid.

Introduction:

Call option: It is an option that facilitates the buyer to buy the underlying assets at a fixed or agreed price irrespective of changes in market price during a specified period.

Answer 8

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

Answer 9

b.

Summary Introduction

To determine: The options strategy to be used when the convictions about the stock’s future movement have to be exploited and the direction of stock price movement.

Introduction:

Straddle Strategy: It refers to a situation where both the options- call option and put options are sold. By doing this, the investor can avail of the benefit of earning a premium on both options.

Answer 10

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 11

c.

Summary Introduction

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author explains the use of the put-call parity equation to compute the price of a 3-month call option and put option.

Videos

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Want to see the full answer?

Chapter 20 Solutions

Solution Summary: The author explains the use of the put-call parity equation to compute the price of a 3-month call option and put option.

Videos

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending. Introduction: Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.

Want to see the full answer?

Chapter 20 Solutions

To compute: The net cost for the establishment of a balance between the call option, put option and the riskless lending.

Introduction:

Riskless lending: This can also be termed as risk-free lending. The investor can lend money at a risk-free interest rate.