Questions from Business Statistics

Q: A call with a strike price of $60 costs $6

A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. Construct a table that shows the profit from a straddle. For what range of stock prices would...

Q: A cattle farmer expects to have 120,000 pounds of live

A cattle farmer expects to have 120,000 pounds of live cattle to sell in 3 months. The live cattle futures contract traded by the CME Group is for the delivery of 40,000 pounds of cattle. How can the...

Q: Suppose that a stock price S follows geometric Brownian motion with expected

Suppose that a stock price S follows geometric Brownian motion with expected return µ and volatility σ:
What is the process followed by the variable Sn? Show that Sn also follows geometric Brownian...

Q: Explain why the market maker’s bid–offer spread represents a real

Explain why the market maker’s bid–offer spread represents a real cost to options investors.

Q: Suppose that x is the yield to maturity with continuous compounding on

Suppose that x is the yield to maturity with continuous compounding on a zero-coupon bond that pays off $1 at time T. Assume that x follows the process
where a,
, and s are positive constants and d...

Q: A trader creates a bear spread by selling a 6-month

A trader creates a bear spread by selling a 6-month put option with a $25 strike price for $2.15 and buying a 6-month put option with a $29 strike price for $4.75. What is the initial investment? What...

Q: Suppose that G is a function of a stock price S and

Suppose that G is a function of a stock price S and time. Suppose that
and
are the volatilities of S and G. Show that, when the expected return of S increases by
, the growth rate of G increases b...

Q: Explain why the AAA-rated tranche of an ABS CDO is

Explain why the AAA-rated tranche of an ABS CDO is more risky than the AAA-rated tranche of an ABS.

Q: What does the Black–Scholes–Merton stock option pricing model

What does the Black–Scholes–Merton stock option pricing model assume about the probability distribution of the stock price in one year? What does it assume about the probability distribution of the co...

Q: What is the price of a European call option on a non

What is the price of a European call option on a non-dividend-paying stock when the stock price is $52, the strike price is $50, the risk-free interest rate is 12% per annum, the volatility is 30% per...