Reference no: EM131354273
This question asks you to apply your knowledge on option securities. Suppose the price of a stock is $100 today and it evolves according to u = 1.1 and d = 0.8 in 6-month periods.
A. Draw and label a tree that shows the price of the stock today, after 6-months and after 1 year.
B. A call option on the stock has exercise price $90 and expires in one year. Denote the price of this call option today as Pcall and then Cu, Cd, and Cuu, Cud, Cdu, Cdd the payoffs after 6 months and 1 year respectively. Calculate Cuu, Cud, Cdu, Cdd.
C. Find the price of such a call option when the 6-month risk-free interest rate is 2 percent.
D. Find the price of a put option on the stock with the same exercise price as the call and expiration date after 1 year.
E. Now suppose that the price of the stock after 1 year can take any positive value. A strip is a portfolio consisting of buying one call and two put options on the same stock with the same exercise price and expiration. Draw the payoff and the profit of a strip as a function of S1, where the call and put exercise prices and prices are those you found above. Write the payoff and the profit of a strap as piece-wise functions.
|
The discount rate can best be described as
: The discount rate can best be described as; How long will it take $10,000 to reach $50,000 if it earns 10% interest compounded semi-annually?
|
|
The total gain or loss on constructive retirement of debt
: Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds. On January 1, 2016, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value ..
|
|
Determine the value of that sum today
: You are to recieve $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
|
|
Discounting approach and reinvestment approach
: Mittuch Corp. is evaluating a project with the following cash flows. The company uses a discount rate of 8 percent and a reinvestment rate of 5 percent on all of its projects. Calculate the MIRR of the project using all three methods with these inter..
|
|
Find the price of a put option on the stock
: Draw and label a tree that shows the price of the stock today, after 6-months and after 1 year. Find the price of such a call option when the 6-month risk-free interest rate is 2 percent. Find the price of a put option on the stock with the same exer..
|
|
Find the outstanding balance just after making the payment
: Suppose a family borrows $101000 on a home for 25 years at 8.1% compounded monthly. Find the monthly payments rounded up to the next cent. Find the outstanding balance just after making the 60th payment.
|
|
Time value of money is important to financial decision
: The concept of time value of money is important to financial decision making because;
|
|
Using the home currency approach-what is net present value
: You are analyzing a very low-risk project with an initial cost of €120000. The project is expected to return €40000 the first year, €50000 the second year and €60000 the third year. The current spot rate is €.54. The nominal return relevant to the pr..
|
|
Stock holds the winning ticket in a state lottery game
: Woodrow Stock holds the winning ticket in a state lottery game. The state offers Woodrow two options to choose from. He can take a one-time cash prize of $4 million, or receive payments of $400,000 a year for 25 years. Explain the interest rate/disco..
|