Calculate the out-of-pocket cost today

Assignment Help Financial Management

Reference no: EM132052692

After watching the prices of drug stocks move up and down by large amounts, you seek an investment strategy that will succeed in spite of these unpredictable fluctuations.

You notice that Merck stock is trading at 36 7/8. Two-month call options at $40 strike price are available for $0.50. Puts with the same expiration date and strike price sell for $3.75. The annual interest rate on two-month Treasury bills is 5%.

a) What option strategy could you follow in order to make money if Merck shares rise OR fall by a significant amount?

b) Draw the payoffs, as of the expiration date, for different outcomes for Merck's stock price. Ignoring foregone interest on any option premia, how much would the share price have to rise in order for the strategy to succeed? How far would the stock price have to fall for the strategy to succeed?

c) If Merck puts were not traded, what alternative strategy could you use to achieve the exact same payoffs as described above?

d) Calculate the out-of-pocket cost today of the alternative strategy you described in part (c)

Reference no: EM132052692

Questions Cloud

Evaluate the price per share of the companys stock : Depreciation, the increase in net working capital, and capital spending are expected to be $166,000, $87,000, and $116,000, respectively.

Should you drop out of school : Your grades are suffering due to your lack of available study time. You feel depressed. Should you drop out of school?

Explain how much will you pay for the policy : If the required return on this investment is 4.80%, how much will you pay for the policy?

Sell at split-off or process further : Adam Chemicals Ltd processes a number of chemical compounds used in producing industrial cleaning products.

Calculate the out-of-pocket cost today : If Merck puts were not traded, what alternative strategy could you use to achieve the exact same payoffs as described above?

Determine how much will you have four years from today : You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Contrast managerial accounting and financial accounting : Discuss how managerial accounting is useful for providing information for at least one of the following management functions: planning, directing, controlling.

Calculate the coefficient of variation for bartman : Construct a scatter diagram that shows Bartman's and Reynold's returns on the vertical axis and the Winslow 5000 Index's returns on horizontal axis.

Research and development expense : On its 2016 income statement, Abbott Laboratories reported research and development expense of $1,422,000,000.

User Account

All Pages