PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 21, Problem 21PS
American options Recalculate the value of the Buffelhead call option (see Problem 6), assuming that the option is American and that at the end of the first six months the company pays a dividend of $25. (Thus, the price at the end of the year is either double or half the ex-dividend price in month 6.) How would your answer change if the option were European?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Give typing answer with explanation and conclusion
What is the lower bound for the price of a 7-month European call option on a non-dividend-paying stock when the stock price is $44.02, the strike price is $39, and the risk-free interest rate is 1.3% per annum? Report your answer in dollars and cents.
What is the price of a one-month European call option given the following information: the exercise price is $19, the current share price is $19, and the risk-free interest rate is 1% per month. Furthermore, the share price is expected to be either $25 or $15 at the end of the month. The company does not pay dividends. Assume a risk-neutral world.
Group of answer choices
$3.11
$1.91
$2.49
$3.32
None of the above answers is correct.
. A European put option written on a non-dividend paying stock that is currently worth ₺100 in the stockmarket has a strike price of ₺100 and exactly five months left until its expiration date. If the continuouslycompounded annual risk-free rate is observed as 20% per year across all maturities and the put option iscurrently priced at ₺3.20 in the option market, what should be the theoretical price of a European call optionwritten on the same stock that has the same strike price and expiration date as the put option described?
Chapter 21 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - Binomial model Imagine that Amazons stock price...Ch. 21 - Prob. 3PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - Prob. 6PSCh. 21 - Two-step binomial model Suppose that you have an...Ch. 21 - Prob. 8PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - BlackScholes model Use the BlackScholes formula to...
Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Option risk a. In Section 21-3, we calculated the...Ch. 21 - Prob. 16PSCh. 21 - Prob. 18PSCh. 21 - American options The price of Moria Mining stock...Ch. 21 - American options Suppose that you own an American...Ch. 21 - American options Recalculate the value of the...Ch. 21 - American options The current price of the stock of...Ch. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Option risk Calculate and compare the risk (betas)...Ch. 21 - Option risk In Section 21-1, we used a simple...Ch. 21 - Prob. 30PS
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
- Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?arrow_forwardA put option and a call option written on the same stock will expire in three months. They both have an exercise price of $45. And they sell for $2.65 and $5.23, respectively. If the underlying stock is currently selling at $47.30, what is the effective annual interest rate? Assume that both options are European options, and that compounding is not continuous.arrow_forwardUsing put-call parity formula, derive expressions for the lower bounds for European call and put options. What is a lower bound for the price of (i) a three-month call option on a non-dividend-paying stock when the stock price is R860, the strike price is R760, and the risk-free interest rate is 10% per annum? (ii) a three-month European put option on a non-dividend-paying stock when the stock price is R500, the strike price is R610, and the discrete risk-free interest rate is 9% per annum?arrow_forward
- A 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_forwardConsider a European put and a European call option which are both written on a non-dividend paying stock, have the same strike price K = £80 and expire in T = 2 months. These options are trading for p = £21 and c = £30.80, respectively. The underlying stock price is S0 = £90. The continuously compounded risk-free rate of interest is r = 10% per annum. What is the present value of the arbitrage profit? Please explain your answer and show your workings. In your response, please show all cash flows (both today and at expiration) and explain why this is an arbitrage (i.e. risk-less) profit.arrow_forwardStock options, gold options and index options are examples of options where the underlying assets are stocks, gold and stock market index, respectively. What is the difference between European and American option? Are European options available exclusively in Europe and American options available exclusively in the United States? You own a call option on Intuit stock with a strike price of RM36. The option will expire in exactly three months’ time. If the stock is trading at RM46 in three months, what will be the payoff of the call? If the stock is trading at RM32 in three months, what will be the payoff of the call? Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Suppose that a June put option to sell a share for RM10 costs RM2 and is held until June. Under what circumstances will the seller of the option make a profit? Under what circumstances will the option exercised?arrow_forward
- Suppose that a stock price is currently 35 dollars, and it is known that four months from now, the price will be either 51 dollars or 29 dollars. Find the value of a European call option on the stock that expires four months from now, and has a strike price of 39 dollars. Assume that no arbitrage opportunities exist and a risk-free interest rate of 10 percent.Answer =dollars.arrow_forwardPlot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5% per year and that its volatility is 20% per year. The two-year risk-free rate of interest is 4%. Explain why there is a region where the option trades for less than its intrinsic value.arrow_forwardA trader sells (or "writes", or "shorts") 100 European call options on a stock with a strike price of $23 and a time to maturity of one year. Each option is on one share of the stock. The price of each option is $4. One year later, the price of the underlying asset proves to be $28. What is the trader’s profit?\\n\\nNote: A gain is represented by a positive number, a loss is represented by a negative number. Please do not include any symbols other than the decimal point, such as the $ or % sign, or any text in your answerarrow_forward
- The price of a European call option on a stock with a strike price of $50.9 is $5.6. The stock price is $40.1, the continuously compounded risk-free rate (all maturities) is 5.2% and the time to maturity is one year. A dividend of $0.6 is expected in six months. What is the price of a one-year European put option on the stock with a strike price equal to the call's strike price? Please state the formula and steps, thanksarrow_forwardSuppose you buy GM put for P3, which matures in two months with a strike price of P60. GM is currently trading at P62.75. If the stock price of GM falls to P57 on the expiration date of the option, the rate of return of your put is at what amount?arrow_forwarda) What is a lower bound for the price of a three-month European put option on a non-dividend-paying stock when the current stock price is $566, the strike price is $523, and the (continuously compounded) risk-free rate is 6% per annum? b) Describe how an investor can create a short calendar spread position using call options. Draw a figure to describe the value of position when the short maturity option expires.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License