Videos
Time Value of Options [LO2] You are given the following information concerning options on a particular stock:
a. What is the intrinsic value of the call option? Of the put option?
b. What is the time value of the call option? Of the put option?
c. Does the call or the put have the larger time value component? Would you expect this to be true in general?
Want to see the full answer?
Check out a sample textbook solution
Chapter 25 Solutions
FUND. OF CORPORATE FIN. 18MNTH ACCESS
- II. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, = 0.5 a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model? c. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless.Note: Use the call and put options prices you have computed in the previous question (a) and (b) above.b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on?arrow_forwardSuppose that JPMorgan Chase sells call options on $1.25 million worth of a stock portfolio with beta = 1.5. The option delta is .8. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio.a. How many dollars’ worth of the market-index portfolio should it purchase to hedge its position?b. Now it decides to use market index puts to hedge its exposure. Should it buy or sell puts? How many? The index at current prices represents $1,000 worth of stock.arrow_forward4) Assume rhat the risk-free rate is 5.5% and the market rate premium is 6%. A) What is the required retuen for the overal stock market? Round 2 decimal places B) what is the required rate of return on a stock with beta of 1.7? Round your answer 2 decimal placesarrow_forward
- K1. Use the Black - Scholes formula to find the value of a call option based on the following input. Refer cumulative normal distribution table. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) stock price $66 exercise price $71 interest rate 7% dividend yield 0% time to expiration .5 standard deviation of stocks returns 20%. a. $1.03 b. $@.65 c.$4.43 d. $5.21arrow_forwardWe will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80.a. Show that the range of S is 50, whereas that of P is 30 across the two states. What is the hedge ratio of the put?b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio?c. What is the present value of the portfolio?d. Given that the stock currently is selling at 100, solve for the value of the put.arrow_forward1. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, � = 0.5 The Call option value is 3.77. and put option value is 1.99 Suppose a European put options has a price higher than that dictated by the putcall parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above)b. Name the options/stock strategy used to proof the put-call parity. explainc. What would be the extent of your profit in (a) depend on? explainarrow_forward
- S2 Q7 Given the following American put option prices and current underlying share price of $304.75, check to see whether the given put options violate the lower bound condition. Where you dettect a violation, devise an arbitrage strategy that will yield a positive cash flow now with zero possible cash flows in the future. Strike Put price 300 7.75 305 8.15 310 8.5 315 9.05arrow_forwardStock A has a beta of 1.2, and its required rate of return is 11.00%. Stock B's beta is 0.80. If the risk-free rate is 4.50%, what is the required rate of return on Stock B? (Ch. 8) Group of answer choices 9.45% 7.07% 8.39% 8.83% 7.95%arrow_forwardSuppose that JPMorgan Chase sells call options on $2.40 million worth of a stock portfolio with beta = 1.50. The option delta is 0.55. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. Suppose it use market index puts to hedge its exposure. The index at current prices represents $2,000 worth of stock and the contract multiplier is 400. Required: How many dollars’ worth of the market-index portfolio should it purchase? What is the delta of a put option? Complete the following:arrow_forward
- Suppose that JPMorgan Chase sells call options on $2.40 million worth of a stock portfolio with beta = 1.50. The option delta is 0.55. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. Suppose it use market index puts to hedge its exposure. The index at current prices represents $2,000 worth of stock and the contract multiplier is 400. Required: How many dollars’ worth of the market-index portfolio should it purchase? What is the delta of a put option? Complete the following: Do number 1 and 3arrow_forwardWe will derive a two-state call option value in this problem. Data: S0 = $190; X = $200; 1 + r = 1.10. The two possibilities for ST are $220 and $120. The portfolio consists of 1 share of stock and 5 calls short. Required: a. The range of S is $100 while that of C is $20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.) b. Calculate the value of a call option on the stock with an exercise price of $200. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward1. Suppose you have the following information concerning a particular options.Stock price, S = RM 21Exercise price, K = RM 20Interest rate, r = 0.08Maturity, T = 180 days = 0.5Standard deviation, � = 0.5 The Call option value is 3.7739. and put option value is 1.8101 Suppose a European put options has a price higher than that dictated by the putcall parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above)b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on?arrow_forward
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning