CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Textbook Question
Chapter 22, Problem 2QP
Understanding Option Quotes Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83.
- a. Are the call options in the money? What is the intrinsic value of an RWJ Corp. call option?
- b. Are the put options in the money? What is the intrinsic value of an RWJ Corp. put option?
- c. Two of the options are clearly mispriced. Which ones? At a minimum, what should the mispriced options sell for? Explain how you could profit from the mispricing in each case.
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Select all that are true with respect to the Black Scholes Option Pricing Model (OPM) in practice):
Group of answer choices
BSOPM assumes that the volatility of the underlying stock returns is constant over time.
BSOPM assumes that the underlying stock can be traded continuously.
BSOPM assumes that there are no transaction costs.
There is only one input to the BSOPM that is not observable at the time you are valuing a stock option, and that input is volatility.
Implied volatility is estimated by calculating the daily volatility of the underlying stock’s return that occurred over the prior six months.
The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero.
The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options.
Based on your understanding of exercise value and option prices, complete the table with a strike price of $28.00:
Stock Price ($)
Strike Price ($)
Exercise Value ($)
Market Price of Option ($)
Time Value ($)
8.00
28.00
0.00
1.56
16.00
28.00
2.10
2.10
20.00
28.00
2.40
2.40
22.00
28.00
0.00
2.60
24.00
28.00
4.00
4.00
After two weeks, the stock price of ABC Corp. increases to $24.96. Suppose you purchased the shares for $16.00 and then sell the…
The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero.
The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options.
Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00:
Stock Price ($)
Strike Price ($)
Exercise Value ($)
Market Price of Option ($)
Time Value ($)
20.00
30.00
0.00
1.56
40.00
30.00
12.10
2.10
50.00
30.00
22.40
2.40
55.00
30.00
25.00
27.60
60.00
30.00
34.00
4.00
After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell…
Chapter 22 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
Ch. 22 - Options What is a call option? A put option? Under...Ch. 22 - Options Complete the following sentence for each...Ch. 22 - American and European Options What is the...Ch. 22 - Intrinsic Value What is the intrinsic value of a...Ch. 22 - Option Pricing You notice that shares of stock in...Ch. 22 - Options and Stock Risk If the risk of a stock...Ch. 22 - Option Risk True or false: The unsystematic risk...Ch. 22 - Prob. 8CQCh. 22 - Option Price and Interest Rates Suppose the...Ch. 22 - Contingent Liabilities When you take out an...
Ch. 22 - Options and Expiration Dates What is the impact of...Ch. 22 - Options and Stock Price Volatility What is the...Ch. 22 - Insurance as an Option An insurance policy is...Ch. 22 - Equity as a Call Option It is said that the equity...Ch. 22 - Prob. 15CQCh. 22 - Put Call Parity You find a put and a call with the...Ch. 22 - Put- Call Parity A put and a call have the same...Ch. 22 - Put- Call Parity One thing put-call parity tells...Ch. 22 - Two-State Option Pricing Model T-bills currently...Ch. 22 - Understanding Option Quotes Use the option quote...Ch. 22 - Calculating Payoffs Use the option quote...Ch. 22 - Two-State Option Pricing Model The price of Ervin...Ch. 22 - Two-State Option Pricing Model The price of Tara,...Ch. 22 - Put-Call Parity A stock is currently selling for...Ch. 22 - Put-Call Parity A put option that expires in six...Ch. 22 - Put-Call Parity A put option and a call option...Ch. 22 - Pot-Call Parity A put option and a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Black-Scholes What are the prices of a call option...Ch. 22 - Delta What are the deltas of a call option and a...Ch. 22 - Prob. 13QPCh. 22 - Prob. 14QPCh. 22 - Time Value of Options You are given the following...Ch. 22 - Prob. 16QPCh. 22 - Prob. 17QPCh. 22 - Prob. 18QPCh. 22 - Black-Scholes A call option has an exercise price...Ch. 22 - Black-Scholes A stock is currently priced at 35. A...Ch. 22 - Equity as an Option Sunburn Sunscreen has a zero...Ch. 22 - Equity as an Option and NPV Suppose the firm in...Ch. 22 - Equity as an Option Frostbite Thermalwear has a...Ch. 22 - Mergers and Equity as an Option Suppose Sunburn...Ch. 22 - Equity as an Option and NPV A company has a single...Ch. 22 - Two-State Option Pricing Model Ken is interested...Ch. 22 - Two-State Option Pricing Model Rob wishes to buy a...Ch. 22 - Two-State Option Pricing Model Maverick...Ch. 22 - Prob. 29QPCh. 22 - Prob. 30QPCh. 22 - Prob. 31QPCh. 22 - Two-State Option Pricing and Corporate Valuation...Ch. 22 - Black-Scholes and Dividends In addition to the...Ch. 22 - Prob. 34QPCh. 22 - Prob. 35QPCh. 22 - Prob. 36QPCh. 22 - Prob. 37QPCh. 22 - Prob. 38QPCh. 22 - Prob. 1MCCh. 22 - Prob. 2MCCh. 22 - Prob. 3MCCh. 22 - Prob. 4MCCh. 22 - Prob. 5MC
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