Reference no: EM131184519
1. Use the formula that relates the value of the call and the put (see Section 16-2) and the one-period binomial model to show that the option delta for a put option is equal to the option delta for a call option minus 1.
2. Show how the option delta changes as the stock price rises relative to the exercise price. Explain intuitively why this is the case. (What happens to the option delta if the exer- cise price of an option is zero? What happens if the exercise price becomes indefinitely large?)
3. Your company has just awarded you a generous stock option scheme. You suspect that the board will either decide to increase the dividend or announce a stock repurchase program. Which do you secretly hope they will decide? Explain.
4. Calculate and compare the risk (betas) of the following investments:
(a) a share of Google stock;
(b) a one-year call option on Google;
(c) a one-year put option;
(d) a portfolio consisting of a share of Google stock and a one-year put option;
(e) a portfolio consisting of a share of Google stock, a one-year put option, and the sale of a one-year call. In each case assume that the exercise price of the option is $430, which is also the current price of Google stock.
Reference book : Principles of Corporate Finance, Concise Edition SECOND EDITION Richard A. Brealey ,Stewart C. Myers Robert C. Merton (1970)
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