a)
To determine: Risk (beta) share of Company G’s stock
a)
Explanation of Solution
The stock beta of Company G’s stock is 1.28.
b)
To determine: One-year call option on Company G.
b)
Explanation of Solution
Calculation of value of call option:
The value of
The value of
Therefore,
Hence, the value of call option is $56.38.
Calculation of option beta:
Therefore, the option beta is 5.53.
c)
To determine: One year put option.
c)
Explanation of Solution
Calculation of one year put option:
From the put-call parity relationship,
Therefore, to replicate the put pay-offs, person X would buy a call with $400 as an exercise price and invest the present value of exercise price and sell the short stock.
The risk can be as follows,
Therefore risk is -4.67.
d)
To determine: One share stock plus one put option.
d)
Explanation of Solution
Calculation of one share plus one option:
It is related to previous question, except the stock positions cancel out, which leaves us with an exercise price of $400 investment in the present value of exercise price.
The risk can be as follows,
Therefore, risk is 0.704 which partially hedged the position.
e)
To determine: One share stock plus one put option minus one call option.
e)
Explanation of Solution
Calculation of one share plus one option minus one call option:
It is related to previous question, except the all call positions cancel out, which leaves us with an investment in the present value of exercise price.
The risk can be as follows,
Therefore, risk is 0.00 which reduced our position to risk-free loan.
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Chapter 21 Solutions
PRINCIPLES OF CORPORATE FINANCE-LL>BI<
- A stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.arrow_forwardGive typing answer with explanation and conclusion to all parts A call option on a non-dividend-paying stock has a market price of +212. The stock price is $15, the exercise price is $13, the time to maturity is 3 months, and the risk-free interest rate is 5% per annum. What is the implied volatility? Please do all work?arrow_forwardWhich of the following positions in options benefit if the underlying stock price increases? Assume the options have several months remaining until the exercise date. a. Short position in call and long position in put b. Short position in both call and put c. Long position in a put d. Long position in call and short position in put e. Short position in a call f. Short position in a put g. Long position in a callarrow_forward
- You are planning for long term investment in a stock. After specific analysis you have two options i.e., Stocks of Company A and Stocks of Company B. You have following data on the stock prices of both companies; Time Line Share A Share B 2010 15 125 2020 41 320 Please select the share that is more likely give you better return in the long run. Also, show your selection process.arrow_forwardPlease answer part A-D and include a short explanation for each part of how you arrived at your answer. A) If a stock has a beta coefficient, b, equal to 2.2, the risk premium associated with the market is 9 percent, and the risk-free rate is 8.8 percent, application of the capital asset pricing model indicates the appropriate return should be: B) Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (b) equal to 2.3. Steve wants to invest an additional $20,000 in a stock that has b = 4.5. After Steve adds the new stock to his portfolio, what will be the portfolio's beta? C) You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 2.2. You have decided to sell one of your stocks, a lead mining stock whose b =1.8, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b =3.7. What will be…arrow_forwardYou have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its net are summarized below. Calculate the beta of the portfolio and use the capital asset pricing model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 18% and that the risk-free rate is 6%. Stock A, Investment = $188,000, Beta=1.50, Stock B, Investment = $282,000, Beta =0.50, Stock C, Investment = $470,000, Beta = 1.30 Beta of the portfolio ? Expected rat of return ? %arrow_forward
- Listed below are the annual rates of return earned on Stock X, Stock Yand Stock Z over the past 6 years.Year Stock X Stock Y Stock Z2014 20% 16% 0%2015 15% 17% -2%2016 -10% 15% 1%2017 30% 11% 0%2018 25% 5% 1%2019 14% -25% 1%As risk-adverse investor, what portfolio would you choose? Here are the options:Stock X only, Stock Y only, Stock Z only, a 50/50 split portfolio made of X & Y,or a 90/10 split portfolio made of X & Y. Show your calculations and support yourchoice.arrow_forwardYou are interested to value a put option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it either increases to $120 or decreases to $80. The risk-free rate of interest is 10%. Calculate the put option's value using the binomial pricing model, presenting your calculations and explanations as follows: a. Draw tree-diagrams to show the possible paths of the share price and put payoffs over one year period. (Note: Show the numbers that are known and use letter(s) for what is unknown in your diagrams.) b. Compute the hedge ratio. c. Find the put option price. Explain your calculations clearly. d. Use put-call parity, find the price of a call option with the same exercise price and the same expiration date.arrow_forwardA non – dividend – paying stock with a current price of $52, the strike price is $50, the risk free interest rate is 12% pa, the volatility is 30% pa, and the time to maturity is 3 months? a) Calculate the price of a call option on this stock b) What is the price of a put option price on this stock? c) Is the put-call parity of these options hold?arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT