Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 21, Problem 2P
Using the information in Problem 1, use the Binomial Model to calculate the price of a one-year put option on Estelle stock with a strike price of $25.
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Calculate the price of a put option on stock using a three-time-step binomial tree model. We know that the current stock price is $70, the strike price is $73, the volatility of the stock is 25%, the maturity of the option is 3 years, and the annual effective risk-free rate is 10%, yearly compounding. How much does this put option worth today if it is American? According to the Put-Call Parity, what should be the price of the European call option that is written on the same stock with the same expiration and the same strike price?
You 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.
In a binomial model, a call option and a put option are both written on the same stock. The exercise price of the call option is 30 and the exercise price of the put option is 40. The call option’s payoffs are 0 and 5 and the put option’s payoffs are 20 and 5. The price of the call is 2.25 and the price of the put is 12.25.
a. What is the riskless interest rate? Assume that the basic period is one year. b. What is the price of the stock today?
Chapter 21 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 21.1 - What is the key assumption of the binomial option...Ch. 21.1 - Why dont we need to know the probabilities of the...Ch. 21.1 - Prob. 3CCCh. 21.2 - What are the inputs of the Black-Scholes option...Ch. 21.2 - What is the implied volatility of a stock?Ch. 21.2 - How does the delta of a call option change as the...Ch. 21.3 - What are risk-neutral probabilities? How can they...Ch. 21.3 - Does the binominal model or Black-Scholes model...Ch. 21.4 - Is the beta of a call greater or smaller than the...Ch. 21.4 - What is the leverage ratio of a call?
Ch. 21.5 - Prob. 1CCCh. 21.5 - The fact that equity is a call option on the firms...Ch. 21 - The current price of Estelle Corporation stock is...Ch. 21 - Using the information in Problem 1, use the...Ch. 21 - Suppose the option in Example 21.11 actually sold...Ch. 21 - Eagletrons current stock price is 10. Suppose that...Ch. 21 - What is the highest possible value for the delta...Ch. 21 - Hema Corp. is an all equity firm with a current...Ch. 21 - Consider the setting of Problem 9. Suppose that in...Ch. 21 - Roslin Robotics stock has a volatility of 30% and...Ch. 21 - Rebecca is interested in purchasing a European...Ch. 21 - Using the data in Table 21.1, compare the price on...Ch. 21 - Consider again the at-the-money call option on...Ch. 21 - Harbin Manufacturing has 10 million shares...Ch. 21 - Using the information on Harbin Manufacturing in...Ch. 21 - Using the information in Problem 1, calculate the...Ch. 21 - Prob. 23PCh. 21 - Prob. 24PCh. 21 - Calculate the beta of the January 2010 9 call...Ch. 21 - Consider the March 2010 5 put option on JetBlue...
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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_forwardBinomial Model The current price of a stock is 20. In 1 year, the price will be either 26 or 16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of 21 and that expires in 1 year. (Hint: Use daily compounding.)arrow_forwardIn 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1) What assumptions underlie the OPM? (2) Write out the three equations that constitute the model. (3) According to the OPM, what is the value of a call option with the following characteristics? Stock price = 27.00 Strike price = 25.00 Time to expiration = 6 months = 0.5 years Risk-free rate = 6.0% Stock return standard deviation = 0.49arrow_forward
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