EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 23, Problem 22QP
a)
Summary Introduction
To compute: The percentage return of call option with a strike price of $750 and if the price of stock increases.
b)
Summary Introduction
To compute: The percentage return when the price of the stock decreases.
c)
Summary Introduction
To discuss: The riskier one option or stock.
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Students have asked these similar questions
Consider a put option on a stock that currently sells for £100, but may rise to £120 or
fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90.
(a) Calculate the value of the put option using the risk-neutral valuation relationship
(RNVR). Explain the reasoning behind your calculations.
Consider a put option on a stock that curretly sclls for £100, but may rise to £120 or
fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90.
(a) Calculate the value of the put option using the risk-neutral valuation relationship
(RNVR). Explain the reasoning behind your calculations.
(b) Calculate the value of the put option by using first principles (No Arbitrage prin-
ciples). Explain the reasoning behind your calculations.
(c) What is the price of a call option on the same stock with the same exercise price
and the same expiration date? Explain the reasoning behind your calculations.
2) Below are call and put option prices for Exxon, expiring on November 17, 2017. The prices are from
September 8, 2017. The price of the stock on September was $78.81. Given all this, what annual interest
rate is implies by these prices?
Some hints:
Use put-call parity, and the exponential formula for the price of money.
There will be several implied interest rates, one for each strike price.
You have to take a natural logarithm to calculate the answers.
The natural log of exp(A)=A.
Calculate interest rates to five digits
Strike
Price
75
77.5
80
82.50
85
Put
Call
Price Price
4.61
2.69 1.64
1.30
0.94
0.51
2.90
4.84
0.16 8.90
Chapter 23 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Ch. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Prob. 3QPCh. 23 - Prob. 4QPCh. 23 - Prob. 5QPCh. 23 - Prob. 6QPCh. 23 - Prob. 7QPCh. 23 - Prob. 8QPCh. 23 - Prob. 9QPCh. 23 - Prob. 10QP
Ch. 23 - Prob. 11QPCh. 23 - Prob. 12QPCh. 23 - Prob. 13QPCh. 23 - Prob. 14QPCh. 23 - Prob. 15QPCh. 23 - Prob. 16QPCh. 23 - Prob. 17QPCh. 23 - Prob. 18QPCh. 23 - Prob. 22QPCh. 23 - Prob. 23QPCh. 23 - Prob. 24QPCh. 23 - Prob. 25QPCh. 23 - Prob. 26QPCh. 23 - Prob. 27QPCh. 23 - Prob. 28QPCh. 23 - Prob. 29QPCh. 23 - Prob. 30QPCh. 23 - Prob. 31QP
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- Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?arrow_forwardConsider a stock with a current price of P = $27.Suppose that over the next 6 months the stockprice will either go up by a factor of 1.41 or downby a factor of 0.71. Consider a call option on thestock with a strike price of $25 that expires in6 months. The risk-free rate is 6%.(1) Using the binomial model, what are the endingvalues of the stock price? What are the payoffsof the call option?arrow_forwardUse the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time toexpiration is 4 months, (4) annualized risk-free rate is 5%, and (5) varianceof stock return is 0.25.arrow_forward
- Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time to expiration is 7 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.09. Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forward3. A stock has a 15 percent change of moving either up or down per period and is currently priced at $25. Using a one period binomial model, and assuming that the risk-free rate is 10 percent, complete the following. a. Determine the possible stock prices at the end of the first period. b. Calculate the intrinsic values at expiration of an at-the-money European call option. c. Find the value of the option today. d. Construct a hedge by combining a position in stock with a position in the call. Show that the return on the hedge is the risk-free rate regardless of the outcome, assuming that the call sells for the value you obtained in c. e. Determine the rate of return from a riskless hedge if the call is selling for $3.50 when the hedge is initiated.arrow_forwardWhat is the value of the following call option according to the Black Scholes Option Pricing Model? What is the value of the put options? Stock Price = $62.50 Strike Price = $60.00 Time to Expiration = 9 Months = 0.75 years. Risk-Free Rate = 2.0%. Stock Return Standard Deviation = 0.45. Draw the payoff picture at expiration for a long position in a call option that has a premium of $1.75 and a strike price of $40. Draw the payoff picture for a short position in the call option given in Problem 2. Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $35. Draw the payoff picture for a short position in the put option given in Problem 4.arrow_forward
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