CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 22, Problem 38QP
Summary Introduction
To show: Delta of the portfolio and reason of being so.
Put Delta:
Delta is used to calculate the degree to which an opportunity is exposed to change in the price of the underlying assets that is stock or commodity. Delta is one of the major risk checker used by the option traders.
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a) The cost of a portfolio consisting of a long position in a call option with strike price 50 and a short position in a call option with strike price 80 is zero (both call options are on the same stock and have the same maturity date). True or false? Explain.
b) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)?
You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date.a. Draw the payoff graph for this strategy.b. Draw the profit graph for this strategy.c. If the underlying stock has positive beta, does this portfolio have positive or negative beta?
Consider the following portfolio. You write a put option with exercise price 90 and buy a put option on the same stock with the same expiration date with exercise price 95.a. Plot the value of the portfolio at the expiration date of the options.b. On the same graph, plot the profit of the portfolio. Which option must cost more?
Chapter 22 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
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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- Draw the profit diagram (profit not payoff) of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. Clearly state any assumptions made. Is the cost of the portfolio positive?arrow_forwarda) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price K, a short position in five call options with exercise price 2K and a long position in four call options with exercise price 3K. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? b) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?arrow_forwarda) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? b) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?arrow_forward
- Which has more value, (a) a portfolio composed of call options on ten different stocks or (b) a single call option on a portfolio composed of the same ten stocks? Assume the exercise price of (b) is equal to the sum of the exercise prices of the call options in (a) and that the expiration dates are identical. Explain your answer!arrow_forwardConstruct a hedge portfolio and by using the binomial option pricing model and find the values of Pu and Pd; and P. Explain the answer and describe the hedge portfolio. A stock currently priced at $100. One period later it can go up to $125, an increase of 25 percent, or down to $80, a decrease of 20 percent. Assume a put option is available with an exercise price of $100. Consider the example in a two-period world. The risk-free rate is 7 percent. The inputs are summarized as follows S = 100 d = 0.80 u = 1.25 X= 100 r = 0.07arrow_forwardThe cost of a portfolio consisting of a long position in a call option with strike price 50 and a short position in a call option with strike price 80 is zero (both call options are on the same stock and have the same maturity date). True or false? Explain.arrow_forward
- Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investors optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?arrow_forwardAPT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?arrow_forwardYou have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forward
- Compute the residual risk measure for portfolio A. Round off your final answer to three digits after the decimal point. Compute the appraisal ratio for portfolio B. Round off your final answer to three digits after the decimal point.arrow_forwardConsider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option.arrow_forwardConsider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option. Put Option = – Now consider the stock of Grotesque Enterprises (GE) traded at the price P = $35 per share. A put option written on GE’s stock has an exercise price…arrow_forward
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