Value of Company B’s call.

Question

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Answer 1

Question

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

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Suppose Carol's stock price is currently $20. If the standard deviation of the continuously compounded returns (σ) on a stock is 60 percent per year. The annual risk-free rate is 12%, compounded every 6 months. A. Using one-step binomial tree, what is the current value of a six-month call option with an exercise price of $25?B. Using two-step binomial tree, what is the current value of a one-year put option with an exercise price of $25?

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a six-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.

A stock index is currently 1,500. Its volatility is 18%. The risk-free rate is 4% per annum (continuously compounded) for all maturities and the dividend yield on the index is 2.5%. Calculate values for u, d, and p when a 6-month time step is used. What is the value a 12-month American put option with a strike price of 1,480 given by a two-step binomial tree.

Answer 2

Question

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

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Answer 3

Question

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

Expert Solution & Answer

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Answer 4

Question

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

Expert Solution & Answer

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Answer 5

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

Answer 6

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

Answer 7

Chapter 21, Problem 6PS

a)

Summary Introduction

To determine: Value of Company B’s call.

Answer 8

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

Answer 9

b)

Summary Introduction

To determine: Value of delta when prices rises to $440 and falls to $110

Answer 10

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

Answer 11

c)

Summary Introduction

To discuss: The way option value of delta is different from the level of stock price.

Answer 12

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

Answer 13

d)

Summary Introduction

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

Answer 14

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Answer 15

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Answer 16

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Answer 17

Ch. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - Binomial model Imagine that Amazons stock price...Ch. 21 - Prob. 3PS Ch. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - Prob. 6PS Ch. 21 - Two-step binomial model Suppose that you have an...Ch. 21 - Prob. 8PS Ch. 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...

Value of Company B’s call.

Solution Summary: The author calculates the value of Company B's call based on the probability of a rise in stock price.

To determine: Value of Company B’s call.

To determine: Value of delta when prices rises to $440 and falls to $110

To discuss: The way option value of delta is different from the level of stock price.

To determine: The way person X could replicate investment in stocks with the combinations of call options and risk-free lending.

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Chapter 21 Solutions