Conviction about stock price future movements

Assignment Help Financial Management

Reference no: EM132061195

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a 6-month call option at an exercise price of $100 is $5.60.

a. If the risk-free interest rate is 10% per year, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.)

Put-call parity $ ______

b. What would be a simple options strategy to exploit your conviction about the stock price’s future movements? How far would it have to move in either direction for you to make a profit on your initial investment?

Hint: a straddle is established by buying both a call and a put on a stock, each with the same exercise price, X, and the same expiration date, T. Straddles are useful strategies for investors who believe a stock will move a lot in price but are uncertain about the direction of the move.

Total cost of the straddle $ ___________

Reference no: EM132061195

Questions Cloud

Mutual fund net asset value is determined : A mutual fund's net asset value is determined by

What is the real risk-free interest rate : what is the real risk-free interest rate?

The real rate of interest and the inflation rate : What would you expect 1-year Treasury bills to return if you ignore the cross product between the real rate of interest and the inflation rate?

What was increase in real purchasing power associated : What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds

Conviction about stock price future movements : What would be a simple options strategy to exploit your conviction about the stock price’s future movements?

Delivery services entered into contractual agreement : Jackson Delivery Services entered into a three-year contractual agreement with Purple Rain Digital Company.

What is the cost of this vacation in today dollars : What is the cost of this vacation in today's dollars, if the discount rate is 9 percent?

What is the monthly payment of the original loan : What is the monthly payment of the original loan? What is the monthly payment refinanced?

Evaluating two mutually exclusive investment projects : Kristy is evaluating two mutually exclusive investment projects (he can choose only one project).

User Account

All Pages