What is the value of the option if it is american option

Assignment Help Financial Management
Reference no: EM131344188

A stock is presently selling for $100. over each of the next two months, the stock will either increase of decrease in value by 9%, and will not pay any dividends. The risk-free rate is 2% per month. Consider a call option on the stock with an exercise price of $90 and a maturity date two months hence: (a) What is the value of the option if it is an American option? What is the value if it is a European option? (b) What position in stocks and bonds at time zero will have the same value as the call at t = 1. (c) If the expected return on the stock is 4% per month, what must the expected return on the call be over the first month? What will the expected return on the call be in the second month given that the stock has fallen to $91?

Reference no: EM131344188

Questions Cloud

Calculate t and the magnitude of the pin reaction at a : The tensioning mechanism of a magnetic tape drive has a mass of 0.4 kg, and its center of gravity is at G. The tension T in the tape is maintained by presetting the tensile force in the spring at B to 14 N. Calculate T and the magnitude of the pin..
What glycoproteins are labeled : What glycoproteins are labeled with M6P? What is the function of the M6P receptor in the membrane of the TGN (Trans Golgi Network)?What is the function of M6P receptors in the plasma membrane? Where do this group of glycoproteins go and what is th..
Describe how cultural and economic issues affect : Discuss your case studies cultural background. Describe how cultural and economic issues affect how your client makes food choices and Assess how culture impacts food choices
What is the role of telomerase in cells : What is the role of telomerase in cells? (What problem does it address? What are the components of telomerase? How does it work?)What is the role of telomerase during embryonic development? What happens to telomerase gene expression in adult cells..
What is the value of the option if it is american option : A stock is presently selling for $100. over each of the next two months, the stock will either increase of decrease in value by 9%, and will not pay any dividends. What is the value of the option if it is an American option? What is the value if it i..
Explain a protocol for the diagnosis : Explain the disorder you selected, including its pathophysiology and epidemiology. (Asthma in children). Explain a protocol for the diagnosis, management, and follow-up care of this disorder. (Asthma in children)
Create data model given to you but in well-structured format : Recreate the data model given to you but in a "well-structured" format. Note: This essentially means adding foreign keys. Be sure to choose key names that make sense. Happy Crusie Lines.
Find the magnitudes of the support reactions at a and c : The homogeneous 18-kg pulley is attached to the bar ABC with a pin at B. The mass of the bar is negligible. The cable running over the pulley carries a tension of 600 N. Determine the magnitudes of the support reactions at A and C.
Stock prices would the butterfly spread lead to loss : Three put options on a stock have the same expiration date and an exercise price of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread could be created. Construct a table showing the profit from the ..

Reviews

Write a Review

Financial Management Questions & Answers

  Present value if the payments are an annuity due

Suppose you are going to receive $13,500 per year for five years. The appropriate inerest rate is 8.4 percent. What is the present value of the payments if they are in the form of an ordinary annuity and what is the present value if the payments are ..

  Exporter to an appreciation of the dollar

All of the following are appropriate responses for a U.S. exporter to an appreciation of the dollar EXCEPT. keep the local currency price constant if demand is highly elastic. keep the foreign currency price constant if demand is highly elastic.

  What is the current value of a share of efg stock

EFG Inc. reported EBIT of 8.5 million for last year. Depreciation expense totaled 5 million and capital expenditures came to 2.5 million. Free cash flow is expected to grow at a rate of 2.5% for the foreseeable future. EFG's equity beta is 1.25, the ..

  How easy is it for investors to consistently beat the market

Searching for patterns in historical return data is called data mining. How does one know the difference between a random pattern and a pattern that has the potential to make money? How easy is it for investors to consistently beat the market? Why?

  A stock with a required rate of return

A stock with a required rate of return of 10 percent sells for $30 per share. The stock’s dividend is expected to grow at a constant rate of 7 percent per year. What is the expected year-end dividend, D1, on the stock?

  The standard deviation of this two-currency portfolio

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 75% of the MNC's funds are Taiwan dollars and 25% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correl..

  Value subordinated debenture bonds with a coupon rate

Bunkys burgers issues some new 1000 par value subordinated debenture bonds with a coupon rate of 12% payable semi annually. the bonds mature 30 yrs. the bond does not ontain a call feature or a converson feature. Compute the annual rate of return you..

  Calculate accumulated depreciation over four years

Reversing Rapids Co. purchases an asset for $188,604. This asset qualifies as a five-year recovery asset under MACRS. The five-year expense percentages for years 1, 2, 3, and 4 are 20.00%, 32.00%, 19.20%, and 11.52% respectively. Reversing Rapids has..

  Discounted cash flow approach-what is its cost of equity

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $20.00 per share, its last dividend was $1.60, and the company will pay a dividend of $1.68 at the end o..

  Present worth of machinery if market rate of interest widget

The Wildwood Widget Company needs a milling machine for its new assembly line. The machine presently costs $85,000, but has a cost inflation rate of 2%. Widget will not need to purchase the machine for 3 years. If the general inflation is expected to..

  Take bet on the yield spread between two bonds

Assume that you wish to take a bet on the yield spread between two bonds: a 10-year corporate bond rated BB and a 10-year Treasury bond. Assume that you believe the economy is going to get much worse in the future, and you wish to make your bet based..

  The maximum federal tax rate on personal income

The maximum federal tax rate on personal income in 2010 was 50%. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lowe..

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