Fair option premium by using binomial option-pricing model

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Reference no: EM132067077

1. The current spot price is S0= $1.12/€, the volatility of the exchange rate is ? = 9.682%. For a 125 days call option with Strike price = $1.15/€, what is the fair option premium by using binomial option-pricing model? Assume prevailing forward rate F125?day = $1.1245/€, USD interest rate for 125 days is r$ = 2%. Euler’s e = 2.71.

A. $0.2183/€

B. $0.1359/€

C. $0.0768/€

D. $0.0179/€

2. Citigroup’s 15-year corporate bond with a face value of $1,000 currently sells for $893.

Which of the following statements is therefore CORRECT?

a. If the yield to maturity (YTM) stays constant until the bond matures, then the bond’s price will remain at $893.

b. The bond’s current yield (CY) is equal to its coupon rate.

c. The bond’s current yield (CY) exceeds its yield to maturity (YTM).

d. The bond’s coupon rate exceeds its current yield (CY).

e. The bond’s yield to maturity (YTM) is greater than its coupon rate.

3. In an early 2012 edition of Fortune magazine, Warren Buffett wrote an article titled, “Why Stocks Beat Gold and Bonds,” which we discussed in some detail during class. In the article, he discussed the principal reasons he prefers to invest in (and hold for the long-term) productive assets, including whole or partial ownership interests in businesses (such as common stocks), farms, and real estate -- over other currency and fixed-income investments such as cash, long-term bonds, and gold.

What are some of his reasons for this preference?

a. He doesn’t believe gold has any productive ability: It doesn’t pay a coupon or dividend, nor does it 'grow' or expand.

b. As investors, we need to make our dollars outpace a general increase in price levels (i.e., inflation).

c. “Risk free” assets like cash are not necessarily risk free.

d. Income and capital gains taxes partly erode our investments over time.

e. All of the above are reasons.

Reference no: EM132067077

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