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Consider pricing a call option with a strike price of $2400 with 4-month maturity on the S&P 500 index. For the purposes of this problem assume the S&P 500 can move up by 35% or down by 20% each two-month period, and that it is currently trading for $2400. The risk-free rate over each two month period is 0.5%. Use a two-period binomial tree as a framework.
(a) What would you estimate the value of the call option to be as of date 0?
(b) What would you estimate the value of the call option to be at date 1 if the S&P 500 went up in value? What if it went down?
(c) If you sold the option, how would you hedge your position by trading in the underlying asset? Be as precise as you can, i.e. outline what positions you would choose to hold from today to maturity.
A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What was the firm’s cash flow from financing activities?
Petty currently has all equity capital structure and considering new structure with 30% debt. 3000 common shares outstanding with total market value of 150,000. interest rate on new debt =14%. how to calculate interest, net income, EPS, and ROE for E..
Why might a company’s board of directors decide to lease office space even though it would be more economical to purchase the property and finance it with a long-term loan?
You purchase a 7 percent $1,000 bond with a term of ten years and reinvest all interest payments. If interest rates rise to 10 percent after you purchase the bond what is the return on your investment in the bond?
Deb has a loan to repay that requires an annuity of $5800 to be paid at the end of each year for a total of 8 consecutive years. Deb has negotiated the terms of the loan such that she does not have to make her first payment until the end of year 5 (s..
Analyze the strengths and weaknesses of the company and write a report either recommending or not recommending purchase of the company stock.
Elmofud, Inc. is considering splitting its stock. what will the price per share be, and what will your total value be in the stock of Elmofud, Inc.?
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. The present value (PV) (at age 30) of your ..
Thompson & Anders, Inc. wish to enhance the stock portfolio of the Radiology Department. After an extensive analysis of the healthcare financial performance, the following cost structure was determined. What is the stock’s value? Suppose the riskines..
Consider a bond paying a coupon rate of 8.00% per year semiannually when the market interest rate is only 3.2% per half-year. The bond has five years until maturity. Find the bond's price today and ten months from now after the next coupon is paid. W..
Suppose that starting one year from now you will receive $410 a year at the end of every year. If the discount rate is 8% what is this stream of cash flows worth today? Suppose that one year from now you will receive $540 and that at the end of every..
Black Sheep broadcasting is considering a five year-project that has a weighted average cost of capital of 14% and a net present value (NPV) of $80,720. Black sheep broadcasting can replicate this project indefinitely. What is the equivalent annual a..
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