Questions from Corporate Finance

Q: How does the price of a call option respond to the following

How does the price of a call option respond to the following changes, other things equal? Does the call price go up or down? a. Stock price increases. b. Exercise price is increased. c. Risk-free rate...

Q: Respond to the following statements. a. “I’m a

Respond to the following statements. a. “I’m a conservative investor. I’d much rather hold a call option on a safe stock like Exxon Mobil than a volatile stock like Amazon.” b. “I bought an American...

Q: Photographic laboratories recover and recycle the silver used in photographic film.

Photographic laboratories recover and recycle the silver used in photographic film. Stikine River Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is t...

Q: Look at actual trading prices of call options on stocks to check

Look at actual trading prices of call options on stocks to check whether they behave as the theory presented in this chapter predicts. For example, a. Follow several options as they approach maturity....

Q: Problem 21 considered an arbitrage opportunity involving an American option. Suppose

Problem 21 considered an arbitrage opportunity involving an American option. Suppose that this option was a European call. Show that there is a similar possible arbitrage profit.

Q: The stock price of Heavy Metal (HM) changes only once

The stock price of Heavy Metal (HM) changes only once a month: Either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 1% per month. a. What is the value of a one-mon...

Q: Take another look at our two-step binomial trees for Amazon

Take another look at our two-step binomial trees for Amazon in Figure 21.2. Use the risk-neutral method to value six-month call and put options with an exercise price of $750. Assume the Amazon stock...

Q: a. Use the Black-Scholes formula to find the value

a. Use the Black-Scholes formula to find the value of the following call option. i. Time to expiration 1 year. ii. Standard deviation 40% per year. iii. Exercise price $50. iv. Stock price $50. v. Int...

Q: Use the Black–Scholes program to estimate how much you should

Use the Black–Scholes program to estimate how much you should be prepared to pay to insure the value of your pension fund portfolio for the coming year. Make reasonable assumptions about the volatilit...

Q: For which of the following options might it be rational to exercise

For which of the following options might it be rational to exercise before maturity? Explain briefly why or why not. a. American put on a non-dividend-paying stock. b. American call—the dividend payme...