PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 21, Problem 25PS
Option delta Use the put-call parity formula (see Section 20-2) and the one-period binomial model to show that the option delta for a put option is equal to the option delta for a call option minus 1.
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In the context of single period binomial option pricing model with p*d = 0.75 and rf = 0.25 the values of the state price must be equal to
A. PV$1u = $0.20 and PV$1d =$0.60
B. PV$1u = $ 0.25 and PV$1d = $0.50
C. PV$1u = $0.20 and PV$1d = $0.50
D. PV$1u = $0.60 and PV$1d =$0.20
What is the Delta of an at-the-money binary option with a payoff 0 at < $100, and payoff 1 at ≥ $100, as it approaches expiry?
Using the attached option pricing model and related data K = 45; St = 40 t = 4/12; r =03; SD/σ = 0.4; N = 0.07, calculate the value of the call option
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
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- Black-Scholes Model Assume that you have been given the following information on Purcell Industries call options: According to the Black-Scholes option pricing model, what is the option’s value?arrow_forwardCalculate the price of call option and put option.arrow_forwardDescribe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) that Black-Scholes-Merton Formula uses to calculate the price of call and put options. Explain how the change in these variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) affects the price of the option.arrow_forward
- Consider a call and a put options with the same strike price and time to expiry. Given that the strike price is exactly equals to the forward price, then: A. Put and call have same premium B. The premium of the put is equal to the forward price C. The premium of the put is equal to the premium of the call plus the present value of the strike D. The premium of the call is equal to the forward pricearrow_forwardReal Options & Game Theory: The value of a call option and a put option is influenced by the following variables: - Underlying asset value- Strike Price- Variance of Underlying asset- Time to Expiration What effect would an increase in each of these variables have on the value of a calloption and a put option?arrow_forwardDefine each of the following terms: i. Investment timing option; growth option; abandonment option; flexibility optionarrow_forward
- Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if So = (1 + r)^Tarrow_forwardConsider the Black-Scholes model. In class, we derived the formula for the price of the European Call option. (a) Using the formula for the European Call option, calculate the Greek Delta. (b) Using the formula for the European Put option, calculate the Greek Delta.arrow_forwardIn binomial approach of option pricing model, fourth step is to create : a. equalize domain of payoff b. equalize ending price c. riskless investment d. high risky investmentarrow_forward
- Explain the call-put parity relation and how it is justified. Black-Scholes-Merton formula uses five variables to calculate the price of call and put options. Explain each of these variables incorporated in Black-Scholes-Merton formula. Show how the change in these variables affects the price of option. Show how these variables are grouped to show put-call parity relationship and suggest the condition in which there is an arbitrage opportunity. (Explain each of the things in detail with an appropriate examples)arrow_forwardWhat does it mean to assert that the delta of a call option is 0.7? How can a short position in 1,000 options be made delta neutral when the delta of each option is 0.7?arrow_forwardCompare the binomial and Black-Scholes option pricing models. What are their differences and similarities? In what circumstances would you prefer one versus the other? Support your arguments using references.arrow_forward
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