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We are interested in pricing a 1-year put option on cisco with a strike price of K=100. Currently CISCO is trading at 80 and the risk free rate is 5% per annum. In addition we assume that (i) CISCO will not pay any dividend and (ii) there are no other derivatives that are trading including other call or put options.
a) Suppose that we follow a Binomial model and CISCO may either appreciate by 50% or depreciate by 25%.
What should be the price of the option based on replication?
What should be the price of the option based on risk neutral pricing?
A student is considering the purchase of two alternative cars. Car A initially costs $1,500 more than Car B, but used 0.05 gallons per mile, vs 0.07 gallons per mile for Car B. Both cars will last for 10 years, and B’s market value is $800 less than ..
Now, assume you have the option of buying a different fitness center with the same average profits and interest rate as the one in Problem #8. You have negotiated the price of this firm down to $800,000. Would you be willing to purchase this one?
40% of a portfolio is invested in Apple stock which has an expected return of 25% and a beta of 1.4. The remaining 60% of the portfolio is invested in Microsoft stock which has an expected return of 9% and a beta of 0.8. What is the beta on the ..
An investor purchases a stock for $57 and a put option for $.85 with a strike price of $52. The investor also sells a call option for $.85 with a strike price of $61. What is the maximum profit and loss for this position?
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What is the value today of a 15-year annuity that pays $600 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 11 percent for Years 1 through 5, and 13 percent thereafter.
Consider the following: A foreign automobile company builds a manufacturing plant in USA and Chinese investors buy U.S. Treasury Bonds. PLEASE EXPLAIN YOUR REASONING
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Tall Trees, Inc is using the net present value (NPV) when evaluating projects. You have to find the NPV for the company's project, assuming the company's cost of capital is 11.87 percent. The initial outlay for the project is $464.600. The project wi..
Bennington Industrial Machines issued 151,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.1 percent. Interest rates have recently increased, and the bonds now have a yield to maturity ..
Assume the total cost of a college education will be $335,000 when your child enters college in 15 years. You presently have $53,000 to invest. Required: What annual rate of interest must you earn on your investment to cover the cost of your child’s ..
A project has an initial requirement of $229,025 for new equipment and $9,004 for net working capital. The fixed assets will be depreciated to a zero book value over the 3-year life of the project and have an estimated salvage value of $82,095. All o..
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