Hedge portfolio earns the risk-free rate over both periods

Assignment Help Financial Management
Reference no: EM131306596

Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call option expiring at the end of the second period has an exercise price of 40.

Question:Construct an example showing that the hedge works. Make sure the example illustrates how the hedge portfolio earns the risk-free rate over both periods.

Reference no: EM131306596

Questions Cloud

Is firm k correctly priced-overpriced or underpriced : Firm K’s shares sell today for $45. It is forecast that the share price will be $51 at the end of one year. Also at that time a dividend of $2.50 is expected to be paid. Firm K’s β is 0.87, the riskless return is 3 % and the market risk premium is 7 ..
What does the present value of an annuity indicate : What formula is used to determine the present value of an annuity? What does the present value of an annuity indicate?
Access - forms and reports : Access - Forms and Reports In this assignment you will learn how to create forms and reports to access and analyze your data. Forms are useful for data entry and navigation. Reports allow you to connect data and create information and then distribute..
Explaining the fundamental processes of signal chain : Assignment - Audio connectivity and interface techniques. Learners are required to produce a report explaining the fundamental processes and operation of the following digital audio signal chain with master word-clock: 20 bit analogue to digital co..
Hedge portfolio earns the risk-free rate over both periods : Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call option expiring at the end of the second period ha..
How you would implement a three lines of defense model : A case analysis either describing how the three lines of defense model is currently being used in a publicly traded company, or how you would implement a three lines of defense model within your organization.
Maximize cash management efficiency : If a firm's suppliers stop offering discounts, what effect would this have on accounts receivable from customers? What is the effect if a firm does not take trade discounts? What are some steps that you can take to maximize cash management efficiency..
Type of financial institution : Which of the following is not a type of financial institution? Which of the following is not able to be written off as an itemized deduction on your taxes?
Create a new database : Create a new database. Add tables based on the design of your entity-relationship diagram from Question 1. Make sure that you:· have the correct primary keys for each table,· add foreign keys,· choose appropriate data types for each field.Paste a scr..

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd