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Delta [LO2] What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?
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Chapter 25 Solutions
FUND. OF CORPORATE FIN. 18MNTH ACCESS
- c=$6, K=$30, S=$50, r=5%, T=3months WHAT IS THE LOWER BOUND OF CALL? Is there an arbitrage strategy? If so, what is the arbitrage strategy? And its relevant CF table?arrow_forwardD6 Finance Suppose that Mr. X buys an option from the broker Y and have to pay 2% transaction fee on the option. Mr. X follows Black & Scholes model to calculate option price. Will Mr. X include transaction fee in option pricing? Why or not? please solve without excel.arrow_forwardV You buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $2.80 and the call price is $4.20. Assume the strike price is $75. What is the cost of this strategy? 2. What are the break-even stock pricesarrow_forward
- Price of Call option is 2.27 Price of Put option is 20.45 Is there an arbitrage opportunity in this market? Explain in detailarrow_forwardFinance 5. Can you replicate the payoff of a call option (create a synthetic call), using a bond, a stock and a put option? If S=$40, X=$40, rf=6%, T=1, and p=$3, how much would it cost to establish this call position?arrow_forwardS2 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_forward
- H5. What is the payoff to the trading strategy if the stock price at expiration is equal to $0 (i.e., the stock price is zero)? What is the payoff to the trading strategy if the stock price at expiration is equal to $50? What portfolio of calls (maturity T, any strike) and/or bonds (Zero Coupon Bond paying $1 at time T) will give you the desired payoff? Group of answer choices Sell $30 zero-coupon bonds, buy a call option with a strike price of $20, sell two call options with a strike of $40, and sell a call option with a strike price of $80 Buy $30 zero-coupon bonds, sell two call option with a strike price of $30, buy 2 call options with a strike of $40, and sell a call with a strike price of $80 It is not possible to construct this payoff with only calls and bonds Sell $50 zero-coupon bonds, buy two call with the strike price of $80, buy two calls with a strike price of $40, and sell a call with a strike of $20 Buy $30 zero-coupon bonds, sell a call option with a strike…arrow_forwardQ. The market rate of return is 14%, beta is 1.5 and the required rate of return is 18.5%. What is risk-free rate of return?arrow_forwardA call option with a strike price of $100 costs $5. A put option with a strike price of $85 costs $4. Explain how a strangle can be created from these two options. What is the cost of this strategy? When should I exercise my options? For what range of future stock prices would the strategy lead to a gain and what is the maximum gain you can receive? Prove your answer by providing an example. 5 For what range of future stock prices would the strategy lead to a loss and what is the maximum loss you could sustain? Prove it by giving an example.arrow_forward
- which one is correct please confirm? Q19: "An increase in the exercise price, all other things held constant, will ______ the call option premium." increase decrease increase or decrease Not enough information is givenarrow_forward10. An announcement that the prices of goods and services in the market are risking would cause an increase in which of the following? O a. The default risk premium O o The risk free rate ) r The liquidity risk premium O o The inflation risk premiumarrow_forwardQ9. How would you hedge the risk of a price rise using a derivative? Group of answer choices 1. You would take out a spot contract to sell the underlying. 2. You would take out a forward contract to sell the underlying. 3. You would take out a spot contract to buy the underlying. 4. You would take out a forward contract to buy the underlying.arrow_forward
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