Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
expand_more
expand_more
format_list_bulleted
Question
Chapter 21, Problem 8PS
a)
Summary Introduction
To construct: The two binomial trees.
b)
Summary Introduction
To construct: The binomial tree if the standard deviation is 30%.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The current price of a stock is $18. In 1 year, the price will be either $28 or $15. The annual risk-free rate is 3%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and
perform the required analysis to answer the question below.
X
Open spreadsheet
Find the price of a call option on the stock that has a strike price is of $23 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your
answer to the nearest cent.
$
Stock returns and your retirement account: Suppose your retirement accounthas a balance today of $25,000 and you are 20 years old. If you are investedin a diversifed portfolio of stocks, you might hope that the historical returnof about 6% continues into the future. Consider how the balance in yourretirement account evolves as you age under the diferent assumptions below.(If you like, use a spreadsheet program to help you with this question.)(a) Compute the balance in your retirement account when you will be 25,30, 40, 50, and 65 years old assuming the average annual rate of return is6%. Assume there are no deposits or withdrawals in this account, so theoriginal balance just accumulates.(b) Do the same thing for rate of return of 5% and 7%. How sensitive is thecalculation to the rate of return?(c) Plot your retirement account balance for these three scenarios (6%, 5%,7%) on a standard scale.(d) Do the same thing with a ratio scale.
The current price of a stock is $20. In 1 year, the price will be either $28 or $15. The annual risk-free rate is 7%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.
Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.
Chapter 21 Solutions
Principles 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
Similar questions
- A stock currently trades at $100. In one month its price will either be $125, $100, or $75. 1 sell you a call option on this stock, struck at $95, for $11. | hedge my exposure by purchasing A shares, borrowing 1004 - 11 in order to fund the purchase. The simple rate of interest is 12%. (@) What will my profit/loss be in one month? {b) Is it possible for me to completely hedge my exposure? Explain.arrow_forwardQuestion 1: ABC Inc stock is launching a new product tomorrow and a trader wishes to exploit this opportunity by holding options. The current stock price is trading at $30. The trader following the stock expects the news to cause the volatility over the next three months to be either 10% or 40%. He believes that there is a 30% chance of the first outcome and a 70% chance of the second outcome. The trader calculates the call prices for three-month options using 10% and 40% volatility. Then using the weighted-average price (from the two prices), the trader creates the implied volatilities. The output table is in the following: A B D. Strike price Call Price Call Price Implied Volatility of the Weighted Average Price (of Columns A and B) 25.53 23.13 (calculated with 10% Vol) (calculated with 40% Vol) 24 6.519 4.358 2.341 0.867 6.943 5.224 26 28 30 32 3.765 20.77 19.80 2.598 1.716 0.195 20.68 34 36 0.025 0.002 1.087 0.661 22.67 24.6 O Discuss the characteristics of the options markets from…arrow_forwardYou own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months time. If the stock is trading at $55 in three months, what will be the payoff of the call? Note: practice drawing the payoff diagram.arrow_forward
- You want to price an American Put option that is written on the stock of Shelby Ltd. The price of the stock is £20, the risk-free interest rate is 5%, the annualised volatility of the stock is 42% and the option expires in 5 months. Given that information, calculate the up-multiplier to be used in a nine-step binomial tree. Write your answer in decimal form with up to three decimal points Answer:arrow_forwardBoth a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for $6? $40 $45 $50 $55 $60arrow_forwardYour broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $3.00 yesterday. Bahnsen's dividend is expected to grow at 8% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%. Use equation below to calculate the present value of this stock. Assume that g = 8% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forward
- Binomial Model The current price of a stock is $15. In 6 months, the price will be either $19 or $11. The annual risk-free rate is 4%. Find the price of a call option on the stock that has a strike price of $13 and that expires in 6 months. (Hint: Use daily compounding.) Assume a 365-day year. Do not round Intermediate calculations. Round your answer to the nearest cent. $arrow_forwardBinomial Model The current price of a stock is $22. In 1 year, the price will be either $27 or $14. The annual risk-free rate is 3%. Find the price of a call option on the stock that has a strike price is of $25 and that expires in 1 year. (Hint: Use daily compounding.) Assume 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent. need full answer no one on Chegg seems to get this right please help 5th time im asking 0.64 is not the answer or 0.86arrow_forwardAssume only two states will exist one year from today when a call on Delta Transportation, Inc. stock expires. The price of Delta stock will be either $60 or $40 on that date. Today, Delta stock trades for $55. The strike price of the call is $50. The continuously compounded risk - free rate is 9%. a. What is the tracking portfolio (\Delta and b)? b. How much are you willing to pay for the call option?arrow_forward
- Explain how a financial market operates? Which of the investment constraints is expected to have the most impact on your decision process? You plan to buy common stock and hold it for one year. You expect to receive both ₱150 and ₱260 from the sale of the stock at the end of the year. How much will you pay for the stock, if you want to a. Have a return of 8% b. A return of 20% c. A return of 15%arrow_forwardAn investor decides to implement a STRADDLE using put options using the following data . The price of stock today is $ 59 , time frame is 6months , the staddle is constructed using a put and a call option with a strike price of $ 61 . The call cost $ 4 and put costs $ 3 . a ) What is the profit ( % ) if in 6 months , if the stock price is at $ 70 b ) What is the profit ( % ) if in 6 months , if the stock price is at $ 60 c ) At what stock price in the future , the investor will make the least / min profit ? d ) Why do investors implement / use this strategy ? For what reason ?arrow_forwardAssume you want to price a call on a stock that has the price of $35 today. The option matures in one year and has the strike price of $34. Assume the stock price is equally likely to go up by 10% or down by 10% in one year, and you plan to use a one-step binomial tree to price the call option. What is the hedge ratio (in decimal format, use 5 decimal places)?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT