Questions from Business Statistics

Q: Consider a two-period, two-state world. Let

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...

Q: Consider a riskless spread with a long position in the August 160

Consider a riskless spread with a long position in the August 160 call and a short position in the October 160 call. Determine the appropriate hedge ratio. Then show how a $1 stock price increase woul...

Q: Consider the right-hand side of the Black–Scholes–

Consider the right-hand side of the Black–Scholes– Merton formula as consisting of the sum of two terms. Explain what each of those terms represents.

Q: On July 6, the dividend yield on the stock is 2

On July 6, the dividend yield on the stock is 2.7 percent. AZ yield-based dividend adjustment procedure. Calculate this answer by hand and then recalculate it using BlackScholesMertonBinomial10e.xls...

Q: Suppose on July 7 the stock will go ex-dividend with

Suppose on July 7 the stock will go ex-dividend with a dividend of $2. Assuming that the options are American, determine whether the July 160 call would be exercised. Estimate the historical volatilit...

Q: Following is the sequence of daily prices on the stock for the

Following is the sequence of daily prices on the stock for the preceding month of June: Estimate the historical volatility of the stock for use in the Black–Scholes–...

Q: Estimate the implied volatility of the August 165 call. Compare your

Estimate the implied volatility of the August 165 call. Compare your answer with the one you obtained in problem 12. Use trial and error. Stop when your answer is within 0.01 of the true implied volat...

Q: On December 9, a Swiss franc call option expiring on January

On December 9, a Swiss franc call option expiring on January 13 had an exercise price of $0.46. The spot exchange rate was $0.4728. The U.S. risk-free rate was 7.1 percent, and the Swiss risk-free rat...

Q: Again, like the previous problem, on February 4 of a

Again, like the previous problem, on February 4 of a particular year, the spot rate for U.S. dollars ($) expressed in euros (€) was $0.7873/€. The U.S. interest rate (compounded annually) was 5.36 per...

Q: A stock is selling for $100 with a volatility of 40

A stock is selling for $100 with a volatility of 40 percent. Consider a call option on the stock with an exercise price of 100 and an expiration of one year. The risk-free rate is 4.5 percent. Let the...