EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 3.A, Problem A.6P
Consider a portfolio of two securities: one share of Johnson and Johnson (JNJ) stock and a bond that pays $100 in one year. Suppose this portfolio is currently trading with a bid price of $141.65 and an ask price of $142.25, and the bond is trading with a bid price of$91.75 and an ask price of$91.95. In this case, what is the no-arbitrage price range for JNJ stock?
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Suppose the 1-year futures price on a stock-index portfolio is 1,914, the stock index currently is 1,900, the 1-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $1,900 investment in the market index portfolio is $40.a. By how much is the contract mispriced?b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing.c. Now assume (as is true for small investors) that if you short sell the stocks in the market index, the proceeds of the short sale are kept with the broker, and you do not receive any interest income on the funds. Is there still an arbitrage opportunity (assuming that you don’t already own the shares in the index)? Explain.d. Given the short-sale rules, what is the no-arbitrage band for the stock-futures price relation-ship? That is, given a stock index of 1,900, how high and how low can the futures price be without giving rise to arbitrage opportunities?
Suppose a stock is currently (time t = 0) worth 100. Further, suppose the one year annually compounded interest rate is 2%, and the two year annually compounded rate is 3%. Find the following:a) The forward price for a forward contract on the stock with maturity year T1 = 1.
b) The forward price for a forward contract on the stock with maturity year T2 = 2.c) The forward price for a forward contract with maturity T1 = 1 on a ZCB with maturity T2 = 2.d) The forward price for a forward contract with maturity T1 = 1 on a forward contract on the stock with maturity T2 = 2 and delivery price K = 101.
Suppose that a call option with a strike price of $48 expires in one year and has a current market price of $5.17. The market price of the
underlying stock is $46.25, and the risk-free rate is 1%. Use put-call parity to calculate the price of a put option on the same underlying stock
with a strike of $48 and an expiration of one year.
The price of a put option on the same underlying stock with a strike of $48 and an expiration of one year is $. (Round to the nearest cent.)
Chapter 3 Solutions
EBK CORPORATE FINANCE
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