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Option pricing
You are required to price a call option on XYZ.com with an exercise price of $60 and six months to expiration. The current stock price of XYZ.com is $60, the risk free rate is 8% p.a. (c.c.) and the volatility of the stock price of XYZ.com is 30% p.a.. XYZ.com will pay a dividend of $1 in exactly four months’ time. This call option is to be priced using a two-period binomial option pricing model, with three months in each period.
Required:
Draw the two-period tree diagram for the adjusted stock price (that recognizes the impact of the dividend) of XYZ.com. Show the expiration date payoffs from the call option.
Compare an American call option with an otherwise identical European call option on the stock of XYZ.com. What is the value of the right to exercise the call option before expiry?
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Magnetic Corporation expects dividends to grow at a rate of 13.82% for the next two years. Compute the following for Magnetic Corporation’s common stock:
Essence of Skunk Fragrances, Ltd., sells 6,500 units of its perfume collection each year at a price per unit of $395. All sales are on credit with terms of 1/30, net 30. The discount is taken by 50 percent of the customers. What is the amount of the ..
They would like to increase their profits and they are looking at focusing in one of two directions. They think they can save 1.50% on their purchase expenses.
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