Intermediate Financial Management (MindTap Course List)
12th Edition
ISBN: 9781285850030
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 5, Problem 3MC
Consider Triple Play’s call option with a $25 strike price. The following table contains historical values for this option at different stock prices:
- (1) Create a table that shows (a) stock price, (b) strike price, (c) exercise value, (d) option price, and (e) the time value, which is the option’s price less its exercise value.
- (2) What happens to the time value as the stock price rises? Why?
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Consider Triple Play’s call option with a $25 strike price. The following table contains historical values for this option at different stock prices:
Stock Price Call Option Price
$25 $ 3.00
30 7.50
35 12.00
40 16.50
45 21.00
50 25.50
Create a table which shows (1) stock price, (2) strike price, (3) exercise value, (4) option price, and (5) the time value.
Consider two put options on different stocks. The table below reports the relevant information for both options:
Put optionTime to maturityCurrent price of underlying stockStrike priceVolatility ( )X1 year$27$1830%Y1 year$25$2030%All else equal, which put option has a lower premium?
A.Put option Y B.Put option X
Suppose that put options on a stock with strike prices $66 and $75 cost $3 and $5, respectively.
How can the options be used to create (a) a bull spread and (b) a bear spread?
For what range of future stock prices will the bear spread strategy be profitable.
Is the profit for the bear spread strategy limited? If so, how much and at what price range?
At what price range will you exercise the long position from the bear spread strategy?
At what range of future stock prices will the bear spread strategy lead to a loss?
What is the maximum loss that you can incur from bear spread strategy and at what price range?
Chapter 5 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 5 - Define each of the following terms:
Option; call...Ch. 5 - Prob. 2QCh. 5 - Prob. 3QCh. 5 - Prob. 1PCh. 5 - The exercise price on one of Flanagan Companys...Ch. 5 - Black-Scholes Model
Assume that you have been...Ch. 5 - Put–Call Parity
The current price of a stock is...Ch. 5 - Prob. 5PCh. 5 - Binomial Model The current price of a stock is 20....Ch. 5 - Prob. 7P
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