All Related Questions of Call Option

Q: On January 2, 2014, Jones Company purchases a call option

On January 2, 2014, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share....

Q: On August 15, 2013, Outkast Co. invested idle cash

On August 15, 2013, Outkast Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $360. The notional value of the call option is 400 shares, and the option price...

Q: The treasurer of Miller Co. has read on the Internet that

The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on W...

Q: The price of Ervin Corp. stock will be either $74

The price of Ervin Corp. stock will be either $74 or $96 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: The price of Tara, Inc., stock will be either $

The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $57 Exercise price = $60 Risk-free rate = 6% per year, compounded continuously Maturity...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity...

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you? Stock price = $67 Exercise price = $70 Risk-free rate = 5%...

Q: Explain why a put option on a bond is conceptually the same

Explain why a put option on a bond is conceptually the same as a call option on interest rates.

Q: A stock is currently priced at $73. The stock will

A stock is currently priced at $73. The stock will either increase or decrease by 15 percent over the next year. There is a call option on the stock with a strike price of $70 and one year until expir...

Q: It is said that the equityholders of a levered firm can be

It is said that the equityholders of a levered firm can be thought of as holding a call option on the firm’s assets. Explain what is meant by this statement.

Q: In addition to the five factors discussed in the chapter, dividends

In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends is: C = S × e–dt × N(d1) – E × e–Rt × N(d2...

Q: A stock is currently priced at $50. The stock will

A stock is currently priced at $50. The stock will never pay a dividend. The risk-free rate is 12 percent per year, compounded continuously, and the standard deviation of the stock’s return is 60 perc...

Q: In the previous problem, assume the risk-free rate is

In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a s...

Q: T-bills currently yield 4.8 percent. Stock in

T-bills currently yield 4.8 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. Wh...

Q: Ken is interested in buying a European call option written on Southeastern

Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend–paying common stock, with a strike price of $75 and one year until expiration. Currently, Sout...

Q: Maverick Manufacturing, Inc., must purchase gold in three months for

Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,530 per ounce, the firm...

Q: An investor is said to take a position in a “collar

An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options sh...

Q: Audrey is considering an investment in Morgan Communications, whose stock currently

Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan’s stock, with an exercise price of $55, has a market value of $3.06. Meanwhile...

Q: Stewart Enterprises’ current stock price is $60 per share. Call

Stewart Enterprises’ current stock price is $60 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at the...

Q: Which of the following events are likely to increase the market value

Which of the following events are likely to increase the market value of a call option on a common stock? Explain. a. An increase in the stock’s price b. An increase in the volatility of the stock pri...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a midsized California company that specializes in creating exotic candies from tropical fruits such as mangoes, pap...

Q: a. Rework Problem 18-4 using the spreadsheet model.

a. Rework Problem 18-4 using the spreadsheet model. Data from Problem 18-4 Assume that you have been given the following information on Purcell Industries: Using the Black-Scholes Option Pricing Mod...

Q: You are a broker for frozen seafood products for Choyce Products.

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of fro...

Q: Dynamic Energy Systems stock is currently trading for $33 per share

Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. I...

Q: You own a call option on Intuit stock with a strike price

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. a. If the stock is trading at $55 in three months, what will be the payoff of th...

Q: Assume that you have shorted the call option in Problem 2.

Assume that you have shorted the call option in Problem 2. a. If the stock is trading at $55 in three months, what will you owe? b. If the stock is trading at $35 in three months, what will you owe? c...

Q: Transit Airlines provides regional jet service in the Mid-South.

Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2018. Transit’s fiscal year ends on December 31. Its annual fina...

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $30.00 has a premium of $4.29, and a 6-month put with the same strike has a premium of $2.64. Assume a 4% continuously compou...

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $35.00 has a premium of $2.27. Assuming a 4% continuously compounded risk-free rate and a 6% continuous dividend yield, what...

Q: This problem builds on the previous problem using the same parameters,

This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation tr...

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $30.00 has a premium of $4.29, and a 6-month put with the same strike has a premium of $2.64. Assume a 4% continuously compou...

Q: True or false: The unsystematic risk of a share of stock

True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: Suppose a certain stock currently sells for $30 per share.

Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuousl...

Q: Suppose the interest rate on T-bills suddenly and unexpectedly rises

Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

Q: A call option matures in six months. The underlying stock price

A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded con...

Q: A call option has an exercise price of $80 and matures

A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

Q: A stock is currently priced at $35. A call option

A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 7 percent per year, compounded continuously, and the standard devia...

Q: A stock is currently selling for $38 per share. A

A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $65 sells for $4.89. The stock is currently priced at $61, and the risk-free rate is 3.6 percent per year, compounded continuously. Wh...

Q: A call option on Bedrock Boulders stock has a market price of

A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share. a. What is the exercise value of the call option...

Q: The treasurer of Miller Co. has read on the Internet that

The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on W...

Q: On January 2, 2012, Jones Company purchases a call option

On January 2, 2012, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share....

Q: On August 15, 2012, Outkast Co. invested idle cash

On August 15, 2012, Outkast Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $360. The notional value of the call option is 400 shares, and the option price...

Q: Make the same assumptions as in the previous problem. a

Make the same assumptions as in the previous problem. a. What is the 9-month forward price for the stock? b. Compute the price of a 95-strike 9-month call option on a futures contract. c. What is the...

Q: For Figure 2.6, verify the following:

For Figure 2.6, verify the following: a. The S&R index price at which the call option diagram intersects the x-axis is $1095.68. b. The S&R index price at which the call option and forward c...

Q: a. Suppose you enter into a long 6-month forward

a. Suppose you enter into a long 6-month forward position at a forward price of $50. What is the payoff in 6 months for prices of $40, $45, $50, $55, and $60? b. Suppose you buy a 6-month call option...

Q: Suppose S0 = $100, K = $50, r

Suppose S0 = $100, K = $50, r = 7.696% (continuously compounded), δ = 0, and T = 1. a. Suppose that for h = 1, we have u = 1.2 and d = 1.05. What is the binomial option price for a call option that li...

Q: Compute estimated profit in 1 year if XYZ sells a call option

Compute estimated profit in 1 year if XYZ sells a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: Let S = $100, K = $95, r

Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option price for an American call option is $18.283. Verify that there is ne...

Q: Repeat the previous problem assuming that the stock pays a continuous dividend

Repeat the previous problem assuming that the stock pays a continuous dividend of 8% per year (continuously compounded). Calculate the prices of the American and European puts and calls. Which options...

Q: In the following, suppose that neither stock pays a dividend.

In the following, suppose that neither stock pays a dividend. a. Suppose you have a call option that permits you to receive one share of Apple by giving up one share of AOL. In what circumstance might...

Q: The price of a non-dividend-paying stock is $

The price of a non-dividend-paying stock is $100 and the continuously compounded risk-free rate is 5%. A 1-year European call option with a strike price of $100 × e0.05×1= $105.127 has a premium of $1...

Q: Torres Corporation (a U.S.-based company) expects

Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchase...

Q: What is the net impact on Dos Santos Company’s 2017 net income

What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? a. $–0–. b. $400 decrease in net income. c. $1,000 decrease in ne...

Q: What is the net impact on Dos Santos Company’s 2018 net income

What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of t...

Q: On June 1, Cairns Corporation purchased goods from a foreign supplier

On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purch...

Q: Spitz Company ordered merchandise from a foreign supplier on November 20 at

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On...

Q: Based on past experience, Leickner Company expects to purchase raw materials

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company a...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: Fergusson Corporation, a U.S. company, manufactures components

Fergusson Corporation, a U.S. company, manufactures components for the automobile industry. In the past, Fergusson purchased actuators used in its products from a supplier in the United States. The co...

Q: An option has a gold futures contract as the underlying asset.

An option has a gold futures contract as the underlying asset. The current 1-year gold futures price is $300/oz, the strike price is $290, the risk-free rate is 6%, volatility is 10%, and time to expi...

Q: Consider the June 165, 170, and 175 call option prices

Consider the June 165, 170, and 175 call option prices in Table 9.1. a. Does convexity hold if you buy a butterfly spread, buying at the ask price and selling at the bid? b. Does convexity hold if yo...

Q: A chooser option (also known as an as-you-

A chooser option (also known as an as-you-like-it option) becomes a put or call at the discretion of the owner. For example, consider a chooser on the S&R index for which both the call, with value C (...

Q: Compute estimated profit in 1 year if Telco buys a call option

Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case.

Q: A collect-on-delivery call (COD) costs zero

A collect-on-delivery call (COD) costs zero initially, with the payoff at expiration being 0 if S

Q: Here is a quote from an investment website about an investment strategy

Here is a quote from an investment website about an investment strategy using options: One strategy investors are applying to the XYZ options is using “synthetic stock.”Asynthetic stock is created whe...

Q: For a stock index, S = $100, σ =

For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3. a. What is the price of a European call option with a strike of $95? b. What is the price of a European put option with a st...

Q: Repeat the previous problem calculating prices for American options instead of European

Repeat the previous problem calculating prices for American options instead of European. What happens? Previous Problem For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3. a. W...

Q: a. What is the 1-year bond forward price in

a. What is the 1-year bond forward price in year 1? b. What is the price of a call option that expires in 1 year, giving you the right to pay $0.9009 to buy a bond expiring in 1 year? c. What is the p...

Q: Consider a one-period binomial model with h = 1,

Consider a one-period binomial model with h = 1, where S = $100, r = 0, σ = 30%, and δ = 0.08. Compute American call option prices for K = $70, $80, $90, and $100. a. At which strike(s) does early exe...

Q: Suppose XYZ is a non-dividend-paying stock. Suppose

Suppose XYZ is a non-dividend-paying stock. Suppose S = $100, σ = 40%, δ = 0, and r = 0.06. a. What is the price of a 105-strike call option with 1 year to expiration? b. What is the 1-year forward pr...

Q: Consider a perpetual call option with S = $50, K

Consider a perpetual call option with S = $50, K = $60, r = 0.06, σ = 0.40, and δ = 0.03. a. What is the price of the option and at what stock price should it be exercised? b. Suppose δ = 0.04 with al...

Q: The price of a 6-month dollar-denominated call option

The price of a 6-month dollar-denominated call option on the euro with a $0.90 strike is $0.0404. The price of an otherwise equivalent put option is $0.0141. The annual continuously compounded dollar...

Q: a. What is the 2-year forward price for a

a. What is the 2-year forward price for a 1-year bond? b. What is the price of a call option that expires in 2 years, giving you the right to pay $0.90 to buy a bond expiring in 1 year? c. What is the...

Q: Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industryfor 500 million yen payable in one year. The current spot rate is ¥124/$ and theone-year forward rate is 110/$. The annual...

Q: A speculator is considering the purchase of five three-month Japanese

A speculator is considering the purchase of five three-month Japanese yen call optionswith a striking price of 96 cents per 100 yen. The premium is 1.35 cents per 100 yen.The spot price is 95.28 cents...

Q: Assume the spot Swiss franc is $0.7000 and the

Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950.What is the minimum price that a six-month American call option with a strikingprice of $0.6800 should sell for in a ra...

Q: Do problem 9 again assuming an American put option instead of a

Do problem 9 again assuming an American put option instead of a call option. Data from Problem 9: Assume the spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum...

Q: It is Tuesday afternoon, February 14, 2012. Richard May

It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer atAmerican Digital Graphics (ADG), sits in his office on the thirty-fourth floor of thebuilding that dominates Rockefeller...

Q: You plan to visit Geneva, Switzerland, in three months to

You plan to visit Geneva, Switzerland, in three months to attend an internationalbusiness conference. You expect to incur a total cost of SF5,000 for lodging,meals, and transportation during your stay...

Q: On May 9, 2017, Glenna purchases 500 shares of Ignaz

On May 9, 2017, Glenna purchases 500 shares of Ignaz Company stock for $7,500. On June 30, 2017, she writes a call option on the stock, giving the grantee the right to buy the stock for $9,000 during...

Q: Pintail’s stock price is currently $200. A one-year

Pintail’s stock price is currently $200. A one-year American call option has an exercise price of $50 and is priced at $75. How would you take advantage of this great opportunity? Now suppose the opti...

Q: Suppose you buy a one-year European call option on Wombat

Suppose you buy a one-year European call option on Wombat stock with an exercise price of $100 and sell a one-year European put option with the same exercise price. The current stock price is $100, an...

Q: Discuss briefly the risks and payoffs of the following positions:

Discuss briefly the risks and payoffs of the following positions: a. Buy stock and a put option on the stock. b. Buy stock. c. Buy call. d. Buy stock and sell call option on the stock. e. Buy bond. f....

Q: The common stock of Triangular File Company is selling at $90

The common stock of Triangular File Company is selling at $90. A 26-week call option written on Triangular File’s stock is selling for $8. The call’s exercise price is $100. The risk-free interest rat...

Q: Some years ago the Australian firm Bond Corporation sold a share in

Some years ago the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its annual earnings by $74 million. A television program...

Q: Look again at the valuation in Table 22.2 of the

Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expa...

Q: The price of Moria Mining stock is $100. During each

The price of Moria Mining stock is $100. During each of the next two six-month periods the price may either rise by 25% or fall by 20% (equivalent to a standard deviation of 31.5% a year). At month 6...

Q: Buffelhead’s stock price is $220 and could halve or double in

Buffelhead’s stock price is $220 and could halve or double in each six month period (equivalent to a standard deviation of 98%). A one-year call option on Buffelhead has an exercise price of $165. The...

Q: Suppose that you own an American put option on Bufflehead stock (

Suppose that you own an American put option on Bufflehead stock (see Problem 12) with an exercise price of $220. a. Would you ever want to exercise the put early? b. Calculate the value of the put....

Q: Recalculate the value of the Buffelhead call option (see Problem 12

Recalculate the value of the Buffelhead call option (see Problem 12), assuming that the option is American and that at the end of the first six months the company pays a dividend of $25. (Thus the pri...

Q: Suppose that you have an option that allows you to sell Buffelhead

Suppose that you have an option that allows you to sell Buffelhead stock (see Problem 12) in month 6 for $165 or to buy it in month 12 for $165. What is the value of this unusual option? Problem 12: B...

Q: The current price of United Carbon (UC) stock is $

The current price of United Carbon (UC) stock is $200. The standard deviation is 22.3% a year, and the interest rate is 21% a year. A one-year call option on UC has an exercise price of $180. a. Use...

Q: a. In Section 21-3 we calculated the risk (

a. In Section 21-3 we calculated the risk (beta) of a six-month call option on Google stock with an exercise price of $530. Now repeat the exercise for a similar option with an exercise price of $450....

Q: a. Can the delta of a call option be greater than

a. Can the delta of a call option be greater than 1.0? Explain. b. Can it be less than zero? c. How does the delta of a call change if the stock price rises? d. How does it change if the risk of th...

Q: Is it better to exercise a call option on the with-

Is it better to exercise a call option on the with-dividend date or on the ex-dividend date? How about a put option? Explain.

Q: Use the put-call parity formula (see Section 20-

Use the put-call parity formula (see Section 20-2) and the one-period binomial model to show that the option delta for a put option is equal to the option delta for a call option minus 1. Section 20-2...

Q: In Section 21-1 we used a simple one-step

In Section 21-1 we used a simple one-step model to value two Google options each with an exercise price of $530. We showed that the call option could be replicated by borrowing $233.22 and investing $...

Q: Some corporations have issued perpetual warrants. Warrants are call options issued

Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant holder to buy the firm’s stock. a. What does the Black–Scholes formula predict for t...

Q: Look again at Table 22.2. How does the value

Look again at Table 22.2. How does the value in 1982 of the option to invest in the Mark II change if a. The investment required for the Mark II is $800 million (vs. $900 million)? b. The present val...

Q: Imagine that Google’s stock price will either rise by 33.3

Imagine that Google’s stock price will either rise by 33.3% or fall by 25% over the next six months (see Section 21-1). Recalculate the value of the call option (exercise price = $530) using (a) the...

Q: Look back at the Malted Herring option in Section 22-2

Look back at the Malted Herring option in Section 22-2. How did the company’s analysts estimate the present value of the project? It turns out that they assumed that the probability...

Q: You own a one-year call option to buy one acre

You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2 million, and the current, appraised market value of the land is $1.7 million. The land is currently...

Q: A variation on Problem 12: Suppose the land is occupied by

A variation on Problem 12: Suppose the land is occupied by a warehouse generating rents of $150,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus wareho...

Q: Over the coming year Ragwort’s stock price will halve to $50

Over the coming year Ragwort’s stock price will halve to $50 from its current level of $100 or it will rise to $200. The one-year interest rate is 10%. a. What is the delta of a one-year call option...

Q: Use the Black–Scholes formula to value the following options:

Use the Black–Scholes formula to value the following options: a. A call option written on a stock selling for $60 per share with a $60 exercise price. The stock’s standard deviation is 6% per month....

Q: “A call option is always riskier than the stock it is

“A call option is always riskier than the stock it is written on.” True or false? How does the risk of an option change when the stock price changes?

Q: Johnny Jones’s high school derivatives homework asks for a binomial valuation of

Johnny Jones’s high school derivatives homework asks for a binomial valuation of a 12-month call option on the common stock of the Overland Railroad. The stock is now selling for $45...

Q: A call option on the stock of Bedrock Boulders has a market

A call option on the stock of Bedrock Boulders has a market price of $7. The stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call optio...

Q: The current price of a stock is $15. In 6

The current price of a stock is $15. In 6 months, the price will be either $18 or $13. The annual risk-free rate is 6%. Find the price of a call option on the stock that has a strike price of $14 and...

Q: Use the Black-Scholes Model to find the price for a

Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time to expiration is 4 months, (4) annualize...

Q: The current price of a stock is $20. In 1

The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and th...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Play is fam...

Q: Chris purchased a call option on a stock for $200.

Chris purchased a call option on a stock for $200. The option gives him the right to purchase the stock at $30 per share until May 1. On May 1, the price of the stock is $28 per share. What is Chris’s...

Q: Teresa purchased a call option on a stock for $250.

Teresa purchased a call option on a stock for $250. The option allows her to purchase the stock for $40 per share if she exercises the option by December 31. On December 15, the stock rises to $60 per...

Q: Maryanne paid $300 for a call option on a stock.

Maryanne paid $300 for a call option on a stock. The option gives her the right to buy the stock for $27 per share until March 1. On February 15, the stock price rises to $32 per share, and Maryanne e...

Q: Suppose that you buy a call option on a $100,

Suppose that you buy a call option on a $100,000 Treasury bond futures contract with an exercise price of 110 for a premium of $1,500. If on expiration the futures contract has a price of 111, what is...

Q: Why does a lower strike price imply that a call option will

Why does a lower strike price imply that a call option will have a higher premium and a put option a lower premium?

Q: Consider a call option with an exercise rate of x on an

Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an M-day rate and pays off based on 360 days in a year. Now consider a...

Q: Using BlackScholesMertonBinomial10e.xlsm, compute the call and put prices for

Using BlackScholesMertonBinomial10e.xlsm, compute the call and put prices for a stock option, where the current stock price is $100, the exercise price is $100, the risk-free interest rate is 5 percen...

Q: The following table lists three financial instruments and their deltas, gammas

The following table lists three financial instruments and their deltas, gammas, and vegas for each $1 million notional amount under the assumption of a long position. (Long in a swap or FRA means to p...

Q: Suppose an investor is considering buying one of two call options on

Suppose an investor is considering buying one of two call options on a particular stock with the same maturity. The only difference between the two call options is the strike prices. The rate of retur...

Q: Consider a call option on an asset with an exercise price of

Consider a call option on an asset with an exercise price of $100, a put option on that same asset with an exercise price of $100, and a forward contract on the asset with an exercise price of $100, a...

Q: The binomial model can be used to price unusual features of options

The binomial model can be used to price unusual features of options. Consider the following scenario: A stock priced at $75 can go up by 20 percent or down by 10 percent per period for three periods....

Q: Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value

Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value of a call option on a stock currently priced at 165.13, where the risk-free rate is 5.875 percent (compounded annu...

Q: Suppose you observe a one-year cash-or-nothing

Suppose you observe a one-year cash-or-nothing digital call option trading for $0.48 and an equivalent cash-or-nothing digital put option trading for $0.45. Calculate the implied interest rate (annual...

Q: On December 9 of a particular year, a January Swiss franc

On December 9 of a particular year, a January Swiss franc call option with an exercise price of 46 had a price of 1.63. The January 46 put was at 0.14. The spot rate was 47.28. All prices are in cents...

Q: Suppose the annually compounded risk-free rate is 5 percent for

Suppose the annually compounded risk-free rate is 5 percent for all maturities. A no dividend-paying common stock is trading at $100. Suppose you are considering a European call option with a strike p...

Q: Consider a call option on the U.S. dollar written

Consider a call option on the U.S. dollar written in Indian rupees (). The current spot exchange rate is 70/$, the Indian interest rate is 7 percent, and the U.S. interest rate is 5 percent (both annu...

Q: Put–call parity is a powerful formula that can be used

Put–call parity is a powerful formula that can be used to create equivalent combinations of options, risk-free bonds, and stock. Suppose there are options available on the number of points LeBron Jame...

Q: Suppose you observe a European call option that is priced at less

Suppose you observe a European call option that is priced at less than the value Max [0, S0 − X (1 r) −T]. What type of transaction should you execute to achieve the maximum benefit? Demonstrate that...

Q: Critique the following statement made by an options investor: “My

Critique the following statement made by an options investor: “My call option is very deepen-the-money. I don’t see how it can go any higher. I think I should exercise it.

Q: Why do higher interest rates lead to higher call option prices but

Why do higher interest rates lead to higher call option prices but lower put option prices?

Q: Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value

Use the Excel spreadsheet BlackScholesMerton Binomial10e.xlsm and determine the value of a call option and a put option on a stock currently priced at 100, where the risk-free rate is 5 percent (compo...

Q: Consider a stock currently priced at $80. In the next

Consider a stock currently priced at $80. In the next period, the stock can either increase by 30 percent or decrease by 15 percent. Assume a call option with an exercise price of $80 and a risk-free...

Q: Suppose the spot exchange rate for Narnian currency is trading for $

Suppose the spot exchange rate for Narnian currency is trading for $2/N and one year later it can go up to $2.5/N, an increase of 25 percent, or down to $1.80/N, a decrease of 10 percent. Assume a cal...

Q: In this chapter, we obtained the binomial option pricing formula by

In this chapter, we obtained the binomial option pricing formula by hedging a short position in the call option with a long position in stock. An alternative way to do this is to combine the stock and...

Q: Consider a stock worth $25 that can go up or down

Consider a stock worth $25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one binomial period. a. Determine the two possible stock prices for the next period....

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: 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: 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...

Q: A stock has a current price of $115.83.

A stock has a current price of $115.83. A European call option on the stock expires in eight weeks and has N(d1) 0.33. If volatility changes by 0.03, approximate the amount the call price is expected...

Q: Suppose a stock is priced at $80 and has a volatility

Suppose a stock is priced at $80 and has a volatility of 0.35. You buy a call option with an exercise price of $80 that expires in three months. The risk-free rate is 5 percent. Answer the following q...

Q: A stock is priced at $50 with a volatility of 35

A stock is priced at $50 with a volatility of 35 percent. A call option with an exercise price of $50 has an expiration in one year. The risk-free rate is 5 percent. Construct a table for stock prices...

Q: A call option on the euro expiring in six months has an

A call option on the euro expiring in six months has an exercise price of $1.00 and is priced at $0.0385. Construct a simple long position in the call.

Q: Assume a standard deviation of 8 percent and use the Black model

Assume a standard deviation of 8 percent and use the Black model to determine whether the call option in problem 17 is correctly priced. If not, suggest a riskless hedge strategy.

Q: One way to create a bull spread positions is by purchasing a

One way to create a bull spread positions is by purchasing a low strike call option and selling a high strike call option. Identify a strategy with put options that creates a similar bull spread shape...

Q: Draw the payoff diagram for the following options: A.

Draw the payoff diagram for the following options: A. Call option to buy a venture’s stock at $3 B. Put option to sell a venture’s stock back to the venture at $15

Q: Draw the payoff for a portfolio of a share of venture equity

Draw the payoff for a portfolio of a share of venture equity and a short call option to buy that share at $5.

Q: The following excerpts are from the 2013 Walgreen Co. Form 10

The following excerpts are from the 2013 Walgreen Co. Form 10-K: The accompanying Notes to Consolidated Financial Statements are integral parts of these statements. Notes to Consolidated Financial S...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: A European call option and put option on a stock both have

A European call option and put option on a stock both have a strike price of $20 and an expiration date in 3 months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock p...

Q: Describe the trading position created in which a call option is bought

Describe the trading position created in which a call option is bought with strike price K2 and a put option is sold with strike price K1 when both have the same time to maturity and K2 > K1. What doe...

Q: The current price of a non-dividend-paying biotech stock

The current price of a non-dividend-paying biotech stock is $140 with a volatility of 25%. The risk-free rate is 4%. For a 3-month time step: (a) What is the percentage up movement? (b) What is the pe...

Q: A stock price is currently $50. It is known that

A stock price is currently $50. It is known that at the end of 6 months it will be either $60 or $42. The risk-free rate of interest with continuous compounding is 12% per annum. Calculate the value o...

Q: Repeat Problem 13.25 for an American put option on a

Repeat Problem 13.25 for an American put option on a futures contract. The strike price and the futures price are $50, the risk-free rate is 10%, the time to maturity is 6 months, and the volatility i...

Q: Footnote 1 of this chapter shows that the correct discount rate to

Footnote 1 of this chapter shows that the correct discount rate to use for the real-world expected payoff in the case of the call option considered in Figure 13.1 is 55.96%. Show that if the option is...

Q: Calculate the value of 9-month American call option to buy

Calculate the value of 9-month American call option to buy 1 million units of a foreign currency using a three-step binomial tree. The current exchange rate is 0.79 and the strike price is 0.80 (both...

Q: Consider an American call option when the stock price is $18

Consider an American call option when the stock price is $18, the exercise price is $20, the time to maturity is 6 months, the volatility is 30% per annum, and the risk-free interest rate is 10% per a...

Q: The Dow Jones Industrial Average on July 20, 2016, was

The Dow Jones Industrial Average on July 20, 2016, was 18,580 and the price of a September 185 (European) call option on the index was $3.35. Use the DerivaGem software to calculate the implied volati...

Q: Suppose that the spot price of the Canadian dollar is U.

Suppose that the spot price of the Canadian dollar is U.S. $0.95 and that the Canadian dollar/U.S. dollar exchange rate has a volatility of 8% per annum. The risk-free rates of interest in Canada and...

Q: Consider a 1-year European call option on a stock when

Consider a 1-year European call option on a stock when the stock price is $30, the strike price is $30, the risk-free rate is 5%, and the volatility is 25% per annum. Use the DerivaGem software to cal...

Q: The formula for the price c of a European call futures option

The formula for the price c of a European call futures option in terms of the futures price F0 is given in Chapter 18 as and K, r, T, and are the strike price, interest rate, time to maturity,...

Q: A 1-year American call option on silver futures has an

A 1-year American call option on silver futures has an exercise price of $9.00. The current futures price is $8.50, the risk-free rate of interest is 12% per annum, and the volatility of the futures p...

Q: The current value of the British pound is $1.60

The current value of the British pound is $1.60 and the volatility of the pound/dollar exchange rate is 15% per annum. An American call option has an exercise price of $1.62 and a time to maturity of...

Q: Estimate delta, gamma, and theta from the tree in Example

Estimate delta, gamma, and theta from the tree in Example 21.3. Explain how each can be interpreted.

Q: A bank has written a call option on one stock and a

A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is 50, the strike price is 51, the volatility is 28% per annum, and the time to ma...

Q: On May 3, 2016, as indicated in Table 1.

On May 3, 2016, as indicated in Table 1.2, the spot offer price of Google stock is $696.25 and the offer price of a call option with a strike price of $700 and a maturity date of September is $39.20....

Q: A trader buys a European call option and sells a European put

A trader buys a European call option and sells a European put option. The options have the same underlying asset, strike price, and maturity. Describe the trader’s position. Under what circumstances d...

Q: A call option on a non-dividend-paying stock has

A call option on a non-dividend-paying stock has a market price of $212. The stock price is $15, the exercise price is $13, the time to maturity is 3 months, and the risk-free interest rate is 5% per...

Q: With the notation used in this chapter: (a)

With the notation used in this chapter: (a) What is N (x)? (b) Show that , where S is the stock price at time t and (c) (d) where c is the price of a call option on a non-dividend-paying stock. (...

Q: Explain carefully why Black’s approach to evaluating an American call option on

Explain carefully why Black’s approach to evaluating an American call option on a dividend-paying stock may give an approximate answer even when only one dividend is anticipated. Does the answer given...

Q: Consider an American call option on a stock. The stock price

Consider an American call option on a stock. The stock price is $50, the time to maturity is 15 months, the risk-free rate of interest is 8% per annum, the exercise price is $55, and the volatility is...

Q: Show that the probability that a European call option will be exercised

Show that the probability that a European call option will be exercised in a risk-neutral world is, with the notation introduced in this chapter, N(d2)What is an expression for the value of a derivati...

Q: A stock price follows geometric Brownian motion with an expected return of

A stock price follows geometric Brownian motion with an expected return of 16% and avolatility of 35%. The current price is $38. (a) What is the probability that a European call option on the stock w...

Q: What are the main differences between a typical employee stock option and

What are the main differences between a typical employee stock option and an American call option traded on an exchange or in the over-the-counter market?

Q: Show that, if C is the price of an American call

Show that, if C is the price of an American call with exercise price K and maturity T on a stock paying a dividend yield of q, and P is the price of an American put on the same stock with the same str...

Q: Show that a European call option on a currency has the same

Show that a European call option on a currency has the same price as the corresponding European put option on the currency when the forward price equals the strike price.

Q: Show that the formula in equation (17.12) for

Show that the formula in equation (17.12) for a put option to sell one unit of currency A for currency B at strike price K gives the same value as equation (17.11) for a call option to buy K units of...

Q: Explain the difference between a call option on yen and a

Explain the difference between a call option on yen and a call option on yen futures.

Q: A futures price is currently 60 and its volatility is 30%.

A futures price is currently 60 and its volatility is 30%. The risk-free interest rate is 8% per annum. Use a two-step binomial tree to calculate the value of a six-month European call option on the f...

Q: Suppose that a one-year futures price is currently 35.

Suppose that a one-year futures price is currently 35. A one-year European call option and a one-year European put option on the futures with a strike price of 34 are both priced at 2 in the market. T...

Q: Show that, if C is the price of an American call

Show that, if C is the price of an American call option on a futures contract when the strike price is K and the maturity is T, and P is the price of an American put on the same futures contract with...

Q: Consider an American futures call option where the futures contract and the

Consider an American futures call option where the futures contract and the option contract expire at the same time. Under what circumstances is the futures option worth more than the corresponding Am...

Q: Suppose you sell a call option contract on April live cattle futures

Suppose you sell a call option contract on April live cattle futures with a strike price of 130 cents per pound. Each contract is for the delivery of 40,000 pounds. What happens if the contract is exe...

Q: What does it mean to assert that the delta of a call

What does it mean to assert that the delta of a call option is 0.7? How can a short position in 1,000 options be made delta neutral when the delta of each option is 0.7?

Q: A stock price is $40. A 6-month European

A stock price is $40. A 6-month European call option on the stock with a strike price of $30 has an implied volatility of 35%. A 6-month European call option on the stock with a strike price of $50 ha...

Q: The Black–Scholes–Merton price of an out-of

The Black–Scholes–Merton price of an out-of-the-money call option with an exercise price of $40 is $4. A trader who has written the option plans to use a stop-loss strategy. The trader’s plan is to bu...

Q: Suppose that a stock price is currently $20 and that a

Suppose that a stock price is currently $20 and that a call option with an exercise price of $25 is created synthetically using a continually changing position in the stock. Consider the following two...

Q: A European call option on a certain stock has a strike price

A European call option on a certain stock has a strike price of $30, a time to maturity of 1 year, and an implied volatility of 30%. A European put option on the same stock has a strike price of $30,...

Q: Use a three-time-step binomial tree to value a

Use a three-time-step binomial tree to value a 9-month American call option on wheat futures. The current futures price is 400 cents, the strike price is 420 cents, the risk-free rate is 6%, and the v...

Q: A 3-month American call option on a stock has a

A 3-month American call option on a stock has a strike price of $20. The stock price is $20, the risk-free rate is 3% per annum, and the volatility is 25% per annum. A dividend of $2 is expected in 1....

Q: How do equations (21.27) to (21.

How do equations (21.27) to (21.30) change when the implicit finite difference method is being used to evaluate an American call option on a currency?

Q: Suppose that Monte Carlo simulation is being used to evaluate a European

Suppose that Monte Carlo simulation is being used to evaluate a European call option on a non-dividend-paying stock when the volatility is stochastic. How could the control variate and antithetic vari...

Q: The spot price of copper is $0.60 per pound

The spot price of copper is $0.60 per pound. Suppose that the futures prices (dollars per pound) are as follows: 3 months……………….. 0.59 6 months………………… 0.57 9 months ………………..0.54 12 months ………………0.50 T...

Q: How would you use the antithetic variable method to improve the estimate

How would you use the antithetic variable method to improve the estimate of the European option in Business Snapshot 21.2 and Table 21.2?

Q: Calculate the price of a 9-month American call option on

Calculate the price of a 9-month American call option on corn futures when the current futures price is 198 cents, the strike price is 200 cents, the risk-free interest rate is 8% per annum, and the v...

Q: What is the difference between entering into a long forward contract when

What is the difference between entering into a long forward contract when the forward price is $50 and taking a long position in a call option with a strike price of $50?

Q: Show by substituting for the various terms in equation (19.

Show by substituting for the various terms in equation (19.4) that the equation is true for: (a) A single European call option on a non-dividend-paying stock (b) A single European put option on a non-...

Q: Consider an American call option on a stock. The stock price

Consider an American call option on a stock. The stock price is $70, the time to maturity is 8 months, the risk-free rate of interest is 10% per annum, the exercise price is $65, and the volatility is...

Q: Explain why employee stock options on a non-dividend-paying

Explain why employee stock options on a non-dividend-paying stock are frequently exercised before the end of their lives, whereas an exchange-traded call option on such a stock is never exercised earl...

Q: Consider a stock index currently standing at 250. The dividend yield

Consider a stock index currently standing at 250. The dividend yield on the index is 4% per annum, and the risk-free rate is 6% per annum. A three-month European call option on the index with a strike...

Q: Use the software DerivaGem to verify that Figures 11.1 and

Use the software DerivaGem to verify that Figures 11.1 and 11.2 are correct.

Q: A stock index is currently 300, the dividend yield on the

A stock index is currently 300, the dividend yield on the index is 3% per annum, and the risk-free interest rate is 8% per annum. What is a lower bound for the price of a six month European call optio...

Q: A currency is currently worth $0.80 and has a

A currency is currently worth $0.80 and has a volatility of 12%. The domestic and foreign risk-free interest rates are 6% and 8%, respectively. Use a two-step binomial tree to value (a) a European fou...

Q: Calculate the value of a three-month at-the-

Calculate the value of a three-month at-the-money European call option on a stock index when the index is at 250, the risk-free interest rate is 10% per annum, the volatility of the index is 18% per a...

Q: A foreign currency is currently worth $1.50. The

A foreign currency is currently worth $1.50. The domestic and foreign risk-free interest rates are 5% and 9%, respectively. Calculate a lower bound for the value of a six-month call option on the curr...

Q: Consider a two-month futures call option with a strike price

Consider a two-month futures call option with a strike price of 40 when the risk-free interest rate is 10% per annum. The current futures price is 47. What is a lower bound for the value of the future...

Q: ‘‘The price of an at-the-money European futures

‘‘The price of an at-the-money European futures call option always equals the price of a similar at-the-money European futures put option.’’ Explain why this statement is true.

Q: Suppose that a futures price is currently 30. The risk-

Suppose that a futures price is currently 30. The risk-free interest rate is 5% per annum. A three-month American futures call option with a strike price of 28 is worth 4. Calculate bounds for the pri...

Q: A trader sells a strangle by selling a 6-month European

A trader sells a strangle by selling a 6-month European call option with a strike price of $50 for $3 and selling a 6-month European put option with a strike price of $40 for $4. For what range of pri...

Q: Trader A enters into a forward contract to buy an asset for

Trader A enters into a forward contract to buy an asset for $1,000 in one year. Trader B buys a call option to buy the asset for $1,000 in one year. The cost of the option is $100. What is the differe...

Q: Calculate the price of a three-month European call option on

Calculate the price of a three-month European call option on the spot value of silver. The three-month futures price is $12, the strike price is $13, the risk-free rate is 4% and the volatility of the...

Q: A futures price is currently 50. At the end of six

A futures price is currently 50. At the end of six months it will be either 56 or 46. The risk-free interest rate is 6% per annum. What is the value of a six-month European call option on the futures...

Q: Calculate the delta of an at-the-money six-

Calculate the delta of an at-the-money six-month European call option on a non-dividend- paying stock when the risk-free interest rate is 10% per annum and the stock price volatility is 25% per annum....

Q: Section 11.1 gives an example of a situation where the

Section 11.1 gives an example of a situation where the value of a European call option decreases as the time to maturity is increased. Give an example of a situation where the same thing happens for a...

Q: Suppose that a March call option to buy a share for $

Suppose that a March call option to buy a share for $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the opt...

Q: It is May and a trader writes a September call option with

It is May and a trader writes a September call option with a strike price of $20. The stock price is $18 and the option price is $2. Describe the trader’s cash flows if the option is held until Septem...

Q: Consider a European call option on a non-dividend-paying

Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time...

Q: Draw a diagram showing the variation of an investor’s profit and loss

Draw a diagram showing the variation of an investor’s profit and loss with the terminal stock price for a portfolio consisting of : (a) One share and a short position in one call option (b) Two shares...

Q: The price of a stock is $40. The price of

The price of a stock is $40. The price of a 1-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a 1-year European call option on the stock with a strike...

Q: Consider an exchange-traded call option contract to buy 500 shares

Consider an exchange-traded call option contract to buy 500 shares with a strike price of $40 and maturity in 4 months. Explain how the terms of the option contract change when there is: (a) a 10% sto...

Q: An investor sells a European call option with strike price of K

An investor sells a European call option with strike price of K and maturity T and buys a put with the same strike price and maturity. Describe the investor’s position.

Q: A company declares a 2-for-1 stock split.

A company declares a 2-for-1 stock split. Explain how the terms change for a call option with a strike price of $60.

Q: What is the effect of an unexpected cash dividend on (a

What is the effect of an unexpected cash dividend on (a) a call option price and (b) a put option price?

Q: What is a lower bound for the price of a 4-

What is a lower bound for the price of a 4-month call option on a non-dividend-paying stock when the stock price is $28, the strike price is $25, and the risk-free interest rate is 8% per annum?

Q: The price of a non-dividend-paying stock is $

The price of a non-dividend-paying stock is $19 and the price of a 3-month European call option on the stock with a strike price of $20 is $1. The risk-free rate is 4% per annum. What is the price of...

Q: What is a lower bound for the price of a 6-

What is a lower bound for the price of a 6-month call option on a non-dividend-paying stock when the stock price is $80, the strike price is $75, and the risk-free interest rate is 10% per annum?

Q: A trader buys a call option with a strike price of $

A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $3 and the put costs $4. Draw a diagram showing...

Q: A stock price is currently $40. It is known that

A stock price is currently $40. It is known that at the end of 1 month it will be either $42 or $38. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a 1-m...

Q: A stock price is currently $50. Over each of the

A stock price is currently $50. Over each of the next two 3-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. What is...

Q: The volatility of a non-dividend-paying stock whose price

The volatility of a non-dividend-paying stock whose price is $78, is 30%. The risk-free rate is 3% per annum (continuously compounded) for all maturities. Calculate values for u, d, and p when a 2-mon...

Q: The futures price of a commodity is $90. Use a

The futures price of a commodity is $90. Use a three-step tree to value (a) a 9-month American call option with strike price $93 and (b) a 9-month American put option with strike price $93. The volati...

Q: A call option with a strike price of $50 costs $

A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. What is the pattern of profits from t...

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...

Q: Explain carefully the difference between selling a call option and buying a

Explain carefully the difference between selling a call option and buying a put option.

Q: A U.S. investor writes five naked call option contracts

A U.S. investor writes five naked call option contracts. The option price is $3.50, the strike price is $60.00, and the stock price is $57.00. What is the initial margin requirement?

Q: Suppose that USD/sterling spot and forward exchange rates are as

Suppose that USD/sterling spot and forward exchange rates are as follows: What opportunities are open to an arbitrageur in the following situations? (a) A 180-day European call option to buy Â&p...

Q: Suppose that a European call option to buy a share for $

Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances wi...

Q: A 4-month European call option on a dividend-paying

A 4-month European call option on a dividend-paying stock is currently selling for $5. The stock price is $64, the strike price is $60, and a dividend of $0.80 is expected in 1 month. The risk-free in...

Q: A futures price is currently 40. It is known that at

A futures price is currently 40. It is known that at the end of three months the price will be either 35 or 45. What is the value of a three-month European call option on the futures with a strike pri...

Q: Describe the terminal value of the following portfolio: a newly entered

Describe the terminal value of the following portfolio: a newly entered-into long forward contract on an asset and a long position in a European put option on the asset with the same maturity as the f...

Q: Consider a 5-year call option on a non-dividend

Consider a 5-year call option on a non-dividend-paying stock granted to employees. The option can be exercised at any time after the end of the first year. Unlike a regular exchange-traded call option...

Q: In Problem 13.19, suppose a trader sells 10,

In Problem 13.19, suppose a trader sells 10,000 European call options and the two-step tree describes the behavior of the stock. How many shares of the stock are needed to hedge the 6-month European c...

Q: Give two reasons why the early exercise of an American call option

Give two reasons why the early exercise of an American call option on a non-dividend paying stock is not optimal. The first reason should involve the time value of money. The second should apply even...

Q: Why is an American call option on a dividend-paying stock

Why is an American call option on a dividend-paying stock always worth at least as much as its intrinsic value. Is the same true of a European call option? Explain your answer.

Q: A stock price is currently $50. It is known that

A stock price is currently $50. It is known that at the end of 2 months it will be either $53 or $48. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 2...

Q: A trader buys a call option with a strike price of $

A trader buys a call option with a strike price of $30 for $3. Does the trader ever exercise the option and lose money on the trade? Explain your answer.

Q: A stock price is currently $100. Over each of the

A stock price is currently $100. Over each of the next two 6-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. What...

Q: A 6-month American call option on a stock is expected

A 6-month American call option on a stock is expected to pay dividends of $1 per share at the end of the second month and the fifth month. The current stock price is $30, the exercise price is $34, th...

Q: An index provides a dividend yield of 1% and has a

An index provides a dividend yield of 1% and has a volatility of 20%. The risk-free interest rate is 4%. How long does a principal-protected note, created as in Example 12.1, have to last for it to be...

Q: A stock price is $29. A trader buys one call

A stock price is $29. A trader buys one call option contract on the stock with a strike price of $30 and sells a call option contract on the stock with a strike price of $32.50. The market prices of t...

Q: True or false: The unsystematic risk of a share of stock

True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock...

Q: Suppose a certain stock currently sells for $30 per share.

Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.

Q: T-bills currently yield 3.9 percent. Stock in

T-bills currently yield 3.9 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. Wh...

Q: Suppose the interest rate on T-bills suddenly and unexpectedly rises

Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics?

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics?

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?

Q: The price of Ervin Corp. stock will be either $53

The price of Ervin Corp. stock will be either $53 or $67 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: It is said that the equity holders of a levered firm can

It is said that the equity holders of a levered firm can be thought of as holding a call option on the firm’s assets. Explain what is meant by this statement.

Q: A stock is currently priced at $84. The stock will

A stock is currently priced at $84. The stock will either increase or decrease by 17 percent over the next year. There is a call option on the stock with a strike price of $80 and one year until expir...

Q: A call option matures in six months. The underlying stock price

A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded con...

Q: A stock is currently priced at $35. A call option

A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 7 percent per year, compounded continuously, and the standard devia...

Q: Pricing Model Ken is interested in buying a European call option written

Pricing Model Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common stock, with a strike price of $65 and one year until expiration. C...

Q: Pricing Model Maverick Manufacturing, Inc., must purchase gold in three

Pricing Model Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,380 per ou...

Q: An investor is said to take a position in a “collar

An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options sh...

Q: In addition to the five factors discussed in the chapter, dividends

In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends is: All of the variabl...

Q: A stock is currently priced at $50. The stock will

A stock is currently priced at $50. The stock will never pay a dividend. The risk-free rate is 12 percent per year, compounded continuously, and the standard deviation of the stock’s return is 60 perc...

Q: The price of Tara, Inc., stock will be either $

The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: A call option has an exercise price of $80 and matures

A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

Q: A stock is currently selling for $47 per share. A

A stock is currently selling for $47 per share. A call option with an exercise price of $50 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $75 sells for $4.89. The stock is currently priced at $72, and the risk-free rate is 3.6 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $85 and three months to expiration sell for $6.18 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuousl...

Q: The company makes colorful 100% cotton shirts that are very popular

The company makes colorful 100% cotton shirts that are very popular among sophisticated business executives. The company uses 100,000 pounds of cotton each month in its production process. On December...

Q: Refer to Practice 19-7 and complete the following:

Refer to Practice 19-7 and complete the following: 1. Compute the total amount (including all option-related cash flows) that the shirt company will pay to buy 100,000 pounds of cotton in January of Y...

Q: Explain why a put option on a bond is conceptually the same

Explain why a put option on a bond is conceptually the same as a call option on interest rates.

Q: On July 1, 2015, Advocate Company exercises an $8

On July 1, 2015, Advocate Company exercises an $8,000 call option (plus par value) on its outstanding bonds that have a carrying value of $416,000 and par value of $400,000. The company exercises the...

Q: Portofi no Company made purchases on account from three foreign suppliers on

Portofi no Company made purchases on account from three foreign suppliers on December 15, 2012, with payment made on January 15, 2013. Information related to these purchases is as follows: Portofi...

Q: On June 1, Year 1, Tsanumis Corporation (a U

On June 1, Year 1, Tsanumis Corporation (a U.S.-based manufacturing fi rm) received an order to sell goods to a foreign customer at a price of 1 million euros. The goods will be shipped and payment wi...

Q: The Zermatt Company ordered parts from a foreign supplier on November 20

The Zermatt Company ordered parts from a foreign supplier on November 20 at a price of 100,000 francs when the spot rate was $0.80 per peso. Delivery and payment were scheduled for December 20. On Nov...

Q: What was the net increase or decrease in cash flow from having

What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $0. b. A $1,000 increase in cash flow. c. A $1,...

Q: Zorba Company, a U.S.-based importer of specialty

Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 cr...

Q: Torres Corporation (a U.S.-based company) expects

Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchase...

Q: On November 1, 2017, Dos Santos Company forecasts the purchase

On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pa...

Q: On November 1, 2017, Dos Santos Company forecasts the purchase

On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pa...

Q: On June 1, Cairns Corporation purchased goods from a foreign supplier

On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purch...

Q: Spitz Company ordered merchandise from a foreign supplier on November 20 at

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On...

Q: Based on past experience, Leickner Company expects to purchase raw materials

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company a...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: During the third quarter of the current year, Beamer Manufacturing Company

During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows...

Q: Medical Distributors, Inc., is a U.S. company

Medical Distributors, Inc., is a U.S. company that buys and sells used medical equipment throughout the United States and Canada. During the month of June, the company had the following transactions w...

Q: Casper Enterprises is forecasting two significant transactions and is concerned that adverse

Casper Enterprises is forecasting two significant transactions and is concerned that adverse price movements could negatively impact these transactions. In order to hedge against adverse movements, Ca...

Q: The chief financial officer (CFO) of Baxter International has employed

The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows: Futures Contract&md...

Q: Suppose you have $28,000 to invest. You’re considering

Suppose you have $28,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $40 per share. You also notice that a call option with a $40 strike price...

Q: In Problem 18, suppose a dividend of $0.80

In Problem 18, suppose a dividend of $0.80 per share is paid. Comment on how the returns would be affected. Data from Problem 18: Suppose you have $28,000 to invest. You’re considering Miller-Moore...

Q: In Problem 18, suppose a put option with a $40

In Problem 18, suppose a put option with a $40 strike is also available with a premium of $2.80. Calculate your percentage return for the six-month holding period if the stock price declines to $36 pe...

Q: You purchase 10 call option contracts with a strike price of $

You purchase 10 call option contracts with a strike price of $75 and a premium of $3.85. If the stock price at expiration is $82, what is your dollar profit? What if the stock price is $72?

Q: A put and a call option have the same maturity and strike

A put and a call option have the same maturity and strike price. If they also have the same price, which one is in the money?

Q: A put and a call option have the same maturity and strike

A put and a call option have the same maturity and strike price. If both are at the money, which is worth more? Prove your answer and then provide an intuitive explanation.

Q: Mr. Wall is a little confused over the relationship between the

Mr. Wall is a little confused over the relationship between the embedded option and the callable bond. How does the value of the embedded call option change when interest rate volatility increases? a....

Q: A call option is currently selling for $3. It has

A call option is currently selling for $3. It has a strike price of $65 and six months to maturity. What is the price of a put option with a $65 strike price and six months to maturity? The current st...

Q: Suppose you have a stock market portfolio with a beta of 1

Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and...

Q: Stock in Cheezy-Poofs Manufacturing is currently priced at $50

Stock in Cheezy-Poofs Manufacturing is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $1.95. Compare the percentage gains and losses from a $97...

Q: A stock is currently selling for $60. Over the next

A stock is currently selling for $60. Over the next two periods, the stock will move up by a factor of 1.15 or down by a factor of 0.87 each period. A call option with a strike price of $60 is availab...

Q: A stock with a current price of $78 has a call

A stock with a current price of $78 has a call option available with a strike price of $80. The stock will move up by a factor of 0.95 or down by a factor of 0.80 each period for the next two periods...

Q: What is the time value of a call option? Of a

What is the time value of a call option? Of a put option? What happens to the time value of a call option as the maturity increases? What about a put option?

Q: What does an option’s delta tell us? Suppose a call option

What does an option’s delta tell us? Suppose a call option with a delta of 0.60 sells for $5.00. If the stock price rises by $1, what will happen to the call’s value?

Q: Suppose you write 10 call option contracts with a $50 strike

Suppose you write 10 call option contracts with a $50 strike. The premium is $2.75. Evaluate your potential gains and losses at option expiration for stock prices of $40, $50, and $60.

Q: Suppose you buy one SPX call option with a strike of 2125

Suppose you buy one SPX call option with a strike of 2125 and write one SPX call option with a strike of 2150. What are the payoffs at maturity to this position for S&P 500 Index levels of 2050, 2100,...

Q: Suppose you buy one SPX call option with a strike of 2100

Suppose you buy one SPX call option with a strike of 2100 and write one SPX put option with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels of 2000, 2050,...

Q: Suppose you buy one each SPX call option with strikes of 2000

Suppose you buy one each SPX call option with strikes of 2000 and 2200 and write two SPX call options with a strike of 2100. What are the payoffs at maturity to this position for S&P 500 Index levels...

Q: You create a bull spread using calls by buying a call and

You create a bull spread using calls by buying a call and simultaneously selling a call on the same stock with the same expiration at a higher strike price. A call option with a strike price of $20 se...

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $84, the strike price is $80, the underlying stock volatility is 42 percent, and the risk-free rate is 4 percent? Assume the option...

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $81, the strike price is $90, the underlying stock volatility is 50 percent, and the risk-free rate is 3 percent? Assume the option...

Q: A stock is currently priced at $63 and has an annual

A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent and the risk-free rate is 4 percent. What is the value of a call opt...

Q: The stock of Nugents Nougats currently sells for $44 and has

The stock of Nugents Nougats currently sells for $44 and has an annual standard deviation of 45 percent. The stock has a dividend yield of 2.5 percent and the risk-free rate is 4.1 percent. What is th...

Q: Ms. Barlow notices that the stock in the table above does

Ms. Barlow notices that the stock in the table above does not pay dividends. If the stock begins to pay a dividend, how will the price of the call option be affected? a. It will decrease. b. It will i...

Q: Mr. Franklin wants to compute the value of the call option

Mr. Franklin wants to compute the value of the call option using the information in Exhibit 1. Which of the following is closest to his answer? a. $4.78 b. $5.55 c. $11.54

Q: A put option with a strike price of $50 sells for

A put option with a strike price of $50 sells for $3.20. The option expires in two months and the current stock price is $51. If the risk-free interest rate is 5 percent, what is the price of a call o...

Q: A stock is currently selling for $45. In one period

A stock is currently selling for $45. In one period, the stock will move up by a factor of 1.15 or down by a factor of 0.87. A call option with a strike price of $50 is available. If the risk-free rat...

Q: A stock is currently priced at $74 and will move up

A stock is currently priced at $74 and will move up by a factor of 1.20 or down by a factor of 0.80 over the next period. The risk-free rate of interest is 4.2 percent. What is the value of a call op...

Q: You are managing a pension fund with a value of $300

You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many c...

Q: What is the value of a call option if the underlying stock

What is the value of a call option if the underlying stock price is $73, the strike price is $75, the underlying stock volatility is 37 percent, and the risk-free rate is 5 percent? Assume the option...

Q: Suppose you buy 50 April 100 call option contracts. How much

Suppose you buy 50 April 100 call option contracts. How much will you pay, ignoring commissions?

Q: In Problem 4, suppose that Hendreeks stock is selling for $

In Problem 4, suppose that Hendreeks stock is selling for $105.70 per share on the expiration date. How much is your options investment worth? What if the stock price is $101.60 on the expiration date...

Q: A call option currently sells for $8. It has a

A call option currently sells for $8. It has a strike price of $80 and five months to maturity. A put with the same strike and expiration date sells for $6. If the risk-free interest rate is 4 percent...

Q: A call option matures in six months. The underlying stock price

A call option matures in six months. The underlying stock price is $70 and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded cont...

Q: A call option has an exercise price of $60 and matures

A call option has an exercise price of $60 and matures in six months. The current stock price is $68 and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the cal...

Q: A stock is currently priced at $55. A call option

A stock is currently priced at $55. A call option with an expiration of one year has an exercise price of $60. The risk-free rate is 12 percent per year, compounded continuously, and the standard devi...

Q: A call option is currently selling for $3.90.

A call option is currently selling for $3.90. It has a strike price of $45 and five months to maturity. The current stock price is $47 and the risk-free rate is 4 percent. The stock will pay a dividen...

Q: A call option is currently selling for $4.60.

A call option is currently selling for $4.60. It has a strike price of $60 and three months to maturity. A put option with the same strike price sells for $7.20. The risk-free rate is 6 percent and th...

Q: A put option is currently selling for $8.30.

A put option is currently selling for $8.30. It has a strike price of $80 and seven months to maturity. The current stock price is $83. The risk-free rate is 5 percent and the stock will pay a $1.40 d...

Q: Suppose you buy one SPX call option contract with a strike of

Suppose you buy one SPX call option contract with a strike of 2200. At maturity, the S&P 500 Index is at 2218. What is your net gain or loss if the premium you paid was $14?

Q: On July 1, 2017, Stan Getz, Inc., bought

On July 1, 2017, Stan Getz, Inc., bought call option contracts for 500 shares of Selmer Manufacturing common stock. The contracts cost $200, expire on September 15, and have an exercise price of $40 p...

Q: Southwest Airlines Co. is a major airline that operates in the

Southwest Airlines Co. is a major airline that operates in the United States. Refer to the following information from Southwest Airlines’ 2015 3rd quarter 10-Q. 3. FINANCIAL DER...

Q: Repeat Problem 32.3 valuing a European put option with a

Repeat Problem 32.3 valuing a European put option with a strike of $87. What is the put–call parity relationship between the prices of European call and put options? Show that the pu...

Q: Suppose that a =0:05, b =0:

Suppose that a =0:05, b =0:08, and
in Vasicek’s model with the initial shortterm interest rate being 6%. Calculate the price of a 2.1-year European call option on a bond that will mature in 3 years....

Q: Suppose that a = 0:05 and
in the Hull

Suppose that a = 0:05 and
in the Hull–White model with the initial term structure being flat at 6% with semiannual compounding. Calculate the price of a2.1-year European call option on a bond that wi...

Q: Explain why a regular European call option is the sum of a

Explain why a regular European call option is the sum of a down-and-out European call and a down-and-in European call. Is the same true for American call options?

Q: In a 3-month down-and-out call option

In a 3-month down-and-out call option on silver futures the strike price is $20 per ounce and the barrier is $18. The current futures price is $19, the risk-free interest rate is 5%, and the volatilit...

Q: Suppose that the strike price of an American call option on a

Suppose that the strike price of an American call option on a non-dividend-paying stock grows at rate g. Show that if g is less than the risk-free rate, r, it is never optimal to exercise the call ear...

Q: Use a three-time-step tree to value an American

Use a three-time-step tree to value an American floating lookback call option on a currency when the initial exchange rate is 1.6, the domestic risk-free rate is 5% per annum, the foreign risk-free in...

Q: What is Merton’s mixed jump–diffusion model price for a European

What is Merton’s mixed jump–diffusion model price for a European call option when r =5%, q =0, =0:3, k = 50%, =25%, S0= 30, K= 30, s = 50%, and T = 1. Use DerivaGem to check your price.

Q: Consider the case of Merton’s jump–diffusion model where jumps always

Consider the case of Merton’s jump–diffusion model where jumps always reduce the asset price to zero. Assume that the average number of jumps per year is
. Show that the price of a European call opti...

Q: Modify Sample Application G in the DerivaGem Application Builder software to test

Modify Sample Application G in the DerivaGem Application Builder software to test the convergence of the price of the trinomial tree when it is used to price a 2-year call option on a 5-year bond with...

Q: A new European-style floating lookback call option on a stock

A new European-style floating lookback call option on a stock index has a maturity of 9 months. The current level of the index is 400, the risk-free rate is 6% per annum, the dividend yield on the ind...

Q: Suppose that a =0:1, b =0:

Suppose that a =0:1, b =0:08, and
in Vasicek’s model, with the initial value of the short rate being 5%. Calculate the price of a 1-year European call option on a zero-coupon bond with a principal of...

Q: Use the answer to Problem 32.5 and put–call

Use the answer to Problem 32.5 and put–call parity arguments to calculate the price of a put option that has the same terms as the call option in Problem 32.5.

Q: In the Hull–White model, a = 0:08

In the Hull–White model, a = 0:08 and
. Calculate the price of a 1-year European call option on a zero-coupon bond that will mature in 5 years when the term structure is flat at 10%, the principal of...

Q: Suppose that each day during July the minimum temperature is
Fahrenheit

Suppose that each day during July the minimum temperature is
Fahrenheit and the maximum temperature is
Fahrenheit. What is the payoff from a call option on the cumulative CDD during July with a str...

Q: A new European-style floating lookback call option on a stock

A new European-style floating lookback call option on a stock index has a maturity of 9 months. The current level of the index is 400, the risk-free rate is 6% per annum, the dividend yield on the ind...

Q: Estimate the value of a new 6-month European-style

Estimate the value of a new 6-month European-style average price call option on a non-dividend- paying stock. The initial stock price is $30, the strike price is $30, the risk-free interest rate is 5%...

Q: Use DerivaGem to calculate the value of: (a)

Use DerivaGem to calculate the value of: (a) A regular European call option on a non-dividend-paying stock where the stock price is $50, the strike price is $50, the risk-free rate is 5% per annum, th...

Q: Consider an up-and-out barrier call option on a

Consider an up-and-out barrier call option on a non-dividend-paying stock when the stock price is 50, the strike price is 50, the volatility is 30%, the risk-free rate is 5%, the time to maturity is 1...

Q: Consider a down-and-out call option on a foreign

Consider a down-and-out call option on a foreign currency. The initial exchange rate is 0.90, the time to maturity is 2 years, the strike price is 1.00, the barrier is 0.80, the domestic risk-free int...

Q: Suppose that the volatilities used to price a 6-month currency

Suppose that the volatilities used to price a 6-month currency option are as in Table 20.2. Assume that the domestic and foreign risk-free rates are 5% per annum and the current exchange rate is 1.00....

Q: A European call option on a non-dividend-paying stock

A European call option on a non-dividend-paying stock has a time to maturity of 6 months and a strike price of $100. The stock price is $100 and the risk-free rate is 5%. Use DerivaGem to answer the f...

Q: A trader wishes to compute the price of a 1-year

A trader wishes to compute the price of a 1-year American call option on a 5-year bond with a face value of 100. The bond pays a coupon of 6% semiannually and the (quoted) strike price of the option i...

Q: Calculate the value of a 4-year European call option on

Calculate the value of a 4-year European call option on bond that will mature 5 years from today using Black’s model. The 5-year cash bond price is $105, the cash price of a 4-year bond with the same...

Q: A call option provides a payoff at time T of
yen

A call option provides a payoff at time T of
yen, where
is the dollar price of gold at time T and K is the strike price. Assuming that the storage costs of gold are zero and defining other variabl...

Q: A Canadian equity index is 400. The Canadian dollar is currently

A Canadian equity index is 400. The Canadian dollar is currently worth 0.70 U.S. dollars. The risk-free interest rates in Canada and the U.S. are constant at 6% and 4%, respectively. The dividend yiel...

Q: You have taken a long position in a call option on IBM

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $176 and IBM’s stock currently trades at $180. The option premium is $5 per contract. a. How mu...

Q: You have written a call option on Walmart common stock. The

You have written a call option on Walmart common stock. The option has an exercise price of $74, and Walmart’s stock currently trades at $72. The option premium is $1.25 per contract. a. How much of t...

Q: What must happen to the price of the underlying T-bond

What must happen to the price of the underlying T-bond futures contract for the purchaser of a call option on T-bond futures to make money? How does the writer of the call option make money?

Q: What is the difference between a call option and a put option

What is the difference between a call option and a put option?

Q: You buy an at-the-money March call option on

You buy an at-the-money March call option on MMC Corp. common stock, which has a strike price of 15 and a premium of 2.83. What must happen to the price of MMC Corp. stock for you to make a profit?

Q: Refer to Table 10–6. a. How many

Refer to Table 10–6. a. How many ExxonMobil October 2016 $90.00 put options were outstanding at the open of trading on August 3, 2016? b. What was the closing price of a 10-year Trea...

Q: You have purchased a call option contract on Johnson & Johnson common

You have purchased a call option contract on Johnson & Johnson common stock. The option has an exercise price of $89.00 and J & J’s stock currently trades at $90.43. The option premium is quoted at $2...

Q: 1. On June 1, 2014, a U.S

1. On June 1, 2014, a U.S. firm contracts to sell equipment (with an asking price of 2,000,000 krona) in Sweden. The firm will take delivery and will pay for the equipment on August 1, 2014. 2. Spot r...

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery and payment are to occur on November 15, 2014. The spot rates on October 1 and November 15...

Q: Following is a sample of 12 Level-I CFA exam questions

Following is a sample of 12 Level-I CFA exam questions that deal with many of the topics covered in Chapters 14 and 15 of this text, including basic properties of options and futures, pricing characte...

Q: A stock trades for $45 per share. A call option

A stock trades for $45 per share. A call option on that stock has a strike price of $50 and an expiration date one year in the future. The volatility of the stock’s return is 30%, and the risk-free ra...

Q: Repeat the analysis of problem 14.17 assuming that the volatility

Repeat the analysis of problem 14.17 assuming that the volatility of the stock’s return is 40%. Intuitively, would you expect this to cause the call price to rise or fall? By how much does the call pr...

Q: Repeat the analysis of problem 14.7, but this time

Repeat the analysis of problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of Faceboo...

Q: With regard to futures options, how much profit would an investor

With regard to futures options, how much profit would an investor make if she bought a call option on gold at 7.20 when gold was trading at $482 an ounce, given that the price of gold went up to $525...

Q: Briefly explain how you would make money on (a) a

Briefly explain how you would make money on (a) a call option and (b) a put option. Do you have to exercise the option to capture the profit?

Q: A six-month call option contract on 100 shares of Home

A six-month call option contract on 100 shares of Home Depot common stock with a strike price of $60 can be purchased for $600. Assuming that the market price of Home Depot stock rises to $75 per shar...

Q: Suppose that a call option with a strike price of $45

Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%. Use...

Q: Suppose that an FI manager writes a call option on a T

Suppose that an FI manager writes a call option on a T-bond futures contract with an exercise price of 114 at a quoted price of 0-55. What type of opportunities or obligations does the manager have?

Q: Consider a European call option on a non-dividend-paying

Consider a European call option on a non-dividend-paying stock where the stock price is $52, the strike price $50, the risk-free rate is 5%, the volatility is 30%, and the time to maturity is one year...

Q: Consider a one-year European call option on a stock when

Consider a one-year European call option on a stock when the stock price is $30, the strike price is $30, the risk-free rate is 5%, and the volatility is 25% per annum. Use the RMFI software to calcul...

Q: On August 15, 2016, Outkast Co. invested idle cash

On August 15, 2016, Outkast Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $360. The notional value of the call option is 400 shares, and the option price...

Q: On January 2, 2017, Jones Company purchases a call option

On January 2, 2017, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share....

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: What is the payoff for a call option with a strike price

What is the payoff for a call option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?

Q: The price of a stock that does not pay dividends is currently

The price of a stock that does not pay dividends is currently $35, and the risk-free rate is 4 percent. A European call option on the stock, with a strike price of $35 and which expires in six months,...

Q: What is the value of a call option if the stock price

What is the value of a call option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?

Q: What is the value at expiration of a call option with a

What is the value at expiration of a call option with a strike price of $65 if the stock price is $1? $50? $65? $100? $1,000?

Q: Suppose that you own a call option and a put option on

Suppose that you own a call option and a put option on the same stock and that these options have the same exercise price. Explain how the relative values of these two options will change as the stock...

Q: The stock of Socrates Motors is currently trading for $40 and

The stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a one-month cal...

Q: Assume that the stock of Socrates Motors is currently trading for $

Assume that the stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What is the value of a o...

Q: Consider the payoff structures of the following two portfolios: a

Consider the payoff structures of the following two portfolios: a. Buying a one month call option on one share of stock at a strike price of $50 and saving the present value of $50 (so that at expirat...

Q: You own a call option on Pepsico stock with a strike price

You own a call option on Pepsico stock with a strike price of $60 per share that expires in 60 days. The current market price of Pepsico stock is $63.50 per share. What are the limits on the value of...

Q: Assume that the current market price of Montrose Industrials stock is $

Assume that the current market price of Montrose Industrials stock is $28 per share and will either rise to $38 per share or fall to $21 per share in one month. The risk-free rate for one month is 1 p...

Q: A writer (seller) of a call option may or may

A writer (seller) of a call option may or may not actually own the underlying asset. If he or she owns the asset, and therefore will have the asset available to deliver should the option be exercised,...

Q: What is a call option, and what do the payoff functions

What is a call option, and what do the payoff functions for the owner and seller of a call option look like?

Q: What are the limits on the value of a call option prior

What are the limits on the value of a call option prior to its expiration date?

Q: The payoff function for the holder of straight debt looks like that

The payoff function for the holder of straight debt looks like that for the seller of a put option. Convertible debt is straight debt plus a call option on a firm’s stock. How does the addition of a c...

Q: The market value of Whole Foods stock is currently $53.

The market value of Whole Foods stock is currently $53.73 per share, and the annual risk-free rate is 3 percent. A three-month call option on the stock with a strike price of $55 sells for $2.15. What...

Q: The stock of Augusta Light and Power is currently selling at $

The stock of Augusta Light and Power is currently selling at $12 per share. Over the next year the company is undertaking a new electricity production project. If the project is successful, the compan...

Q: Options can be combined to create more complicated payoff structures. Consider

Options can be combined to create more complicated payoff structures. Consider the combination of one put option and one call option with the same expiration date and the same strike price. Draw the p...

Q: If you thought that the share price of a stock was going

If you thought that the share price of a stock was going to fall, would you buy a call option or a put option?

Q: A call option on common stock is being evaluated. If the

A call option on common stock is being evaluated. If the stock goes down, the option will expire worthless. If the stock goes up, the payoff depends on just how high the stock goes. For simplicity, th...

Q: James O’Hagan was a partner in the law firm Dorsey & Whitney

James O’Hagan was a partner in the law firm Dorsey & Whitney in Minneapolis, Minnesota. Grand Metropolitan PLC (Grand Met), a company based in London, England, hired Dorsey & Whitney to represent it i...

Q: Define the problem statement (the why and the what) in

Define the problem statement (the why and the what) in the following situation: Employee loyalty Companies benefit through employee loyalty. Crude downsizing in organizations during the recession crus...

Q: The put-call parity condition is altered when dividends are paid.

The put-call parity condition is altered when dividends are paid. The dividend adjusted put-call parity formula is:S × e dt + P =E × e Rt + Cwhere d is again the continuously compounded dividend yield...

Q: A stock is currently priced at $47. A call option

A stock is currently priced at $47. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 12 percent per year, compounded continuously, and the standard devi...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 call option on corn futures with a strike price of $3.85. Assume you purchased the option at the last price....

Q: T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $58 per share. There is no possibility that the stock will be worth less than $50 per share in one year.a....

Q: Suppose a share of stock sells for $63. The risk-free

Suppose a share of stock sells for $63. The risk-free rate is 5 percent, and the stock price in one year will be either $70 or $80.a. What is the value of a call option with an exercise price of $70?b...

Q: The price of Chive Corp. stock will be either $67

The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price...

Q: The price of Cilantro, Inc., stock will be either $70

The price of Cilantro, Inc., stock will be either $70 or $90 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current pr...

Q: A one-year call option contract on Cheesy Poofs Co. stock

A one-year call option contract on Cheesy Poofs Co. stock sells for $845. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current v...

Q: A call option with an exercise price of $25 and

A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: A call option matures in six months. The underlying stock

A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded con...

Q: A call option has an exercise price of $60 and

A call option has an exercise price of $60 and matures in six months. The current stock price is $64, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

Q: A stock is currently selling for $67 per share. A

A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an

A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise

A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: A put option and call option with an exercise price

A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual continuously...

Q: What are the prices of a call option and a

What are the prices of a call option and a put option with the following characteristics?,,,

Q: What are the deltas of a call option and a

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?,,,

Q: In addition to the five factors discussed in the chapter,

In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is:All of the variables are the same as th...

Q: A stock is currently priced at $47. A call option

A stock is currently priced at $47. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 12 percent per year, compounded continuously, and the standard devi...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 call option on corn futures with a strike price of $3.85. Assume you purchased the option at the last price....

Q: T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $58 per share. There is no possibility that the stock will be worth less than $50 per share in one year.a....

Q: Suppose a share of stock sells for $63. The risk-free

Suppose a share of stock sells for $63. The risk-free rate is 5 percent, and the stock price in one year will be either $70 or $80.a. What is the value of a call option with an exercise price of $70?b...

Q: The price of Chive Corp. stock will be either $67

The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price...

Q: The price of Cilantro, Inc., stock will be either $70

The price of Cilantro, Inc., stock will be either $70 or $90 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current pr...

Q: A one-year call option contract on Cheesy Poofs Co. stock

A one-year call option contract on Cheesy Poofs Co. stock sells for $845. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current v...

Q: A call option with an exercise price of $25 and

A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: A call option matures in six months. The underlying stock

A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded con...

Q: A call option has an exercise price of $60 and

A call option has an exercise price of $60 and matures in six months. The current stock price is $64, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

Q: A stock is currently selling for $67 per share. A

A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: A put option that expires in six months with an

A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise

A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: A put option and call option with an exercise price

A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual continuously...

Q: What are the prices of a call option and a

What are the prices of a call option and a put option with the following characteristics?,,,

Q: What are the deltas of a call option and a

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?,,,

Q: In addition to the five factors discussed in the chapter,

In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is:All of the variables are the same as th...

Q: What are the differences between a call option and a put option

What are the differences between a call option and a put option?

Q: As of today, the following information is available:

As of today, the following information is available: Using this information, make three independent forecasts of the 1-year future spot rate for the Israeli shekel. (Use exact, not approximation, re...

Q: Targezept Bionics Inc. has a common stock outstanding that sells for

Targezept Bionics Inc. has a common stock outstanding that sells for $21 per share. A call option on the stock has an exercise price of $20 and will expire in three months. Based on an analysis of the...

Q: Use the option price calculator that can be found at www.

Use the option price calculator that can be found at www.numa.com, or another option price calculator, to test the sensitivity of option values to changes in the key input variables. Use the data from...

Q: One of the most important operating expenses for the Olde Virginia Brick

One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now app...

Q: What variables are important in determining call option prices?

What variables are important in determining call option prices?

Q: Will call option values generally be higher at a time when interest

Will call option values generally be higher at a time when interest rates are relatively high, compared with a time when interest rates are relatively low, all other things being equal?

Q: How does a stock’s expected price volatility affect the value of a

How does a stock’s expected price volatility affect the value of a call option on it?

Q: The BWS Corporation stock is selling at $50 a share today

The BWS Corporation stock is selling at $50 a share today. a. Calculate the value of a BWS call option if its exercise price is $40 and it expires today. b. What can you say about the value of a BWS...

Q: The cash flows associated with a call option on euros by a

The cash flows associated with a call option on euros by a U.S. dollar based investor occur at different points in time. What are they and how much does the time element matter?

Q: The current price of a stock is $ 33,and the

The current price of a stock is $ 33,and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a...

Q: Consider the following call option: • The current price of

Consider the following call option: • The current price of the stock on which the call option is written is $20.00; • The exercise or strike price of the call option is $18.00; • The maturity of the c...

Q: You’ve just been introduced to the Black-Scholes option pricing model

You’ve just been introduced to the Black-Scholes option pricing model and would like to use it to calculate the value of a call option on TriHawk stock. Currently, TriHawk’s common stock is selling fo...

Q: Mr. Kent, one of your clients, has been reading

Mr. Kent, one of your clients, has been reading his daughter ’ s finance textbook and has a question about options. He says: “If I buy a call option, I have the right to buy the asset at the strike pr...

Q: The current price of a stock is $107. You expect

The current price of a stock is $107. You expect the price of the stock to be in the range of $105 to $115 in the next period. The call option with an exercise price of $115 is $1.30; the put option w...

Q: Xiang Zhu, a client of FinCorp Inc., has phoned you

Xiang Zhu, a client of FinCorp Inc., has phoned you with a question. She has been reading a finance textbook and cannot understand how to use the binomial option pricing model to value a call option....

Q: Compare the payoff of a call option and the underlying security.

Compare the payoff of a call option and the underlying security. Show that the price of a call option must always be less than the value of the underlying security.

Q: QBV, a non‐dividend‐paying stock, is currently

QBV, a non‐dividend‐paying stock, is currently trading for $80 a share. There is a 25‐percent chance that the stock will trade for $65 in one year, and a 75‐percent chance that the price will increase...

Q: QBV, a non‐dividend‐paying stock, is currently

QBV, a non‐dividend‐paying stock, is currently trading for $100 a share. There is a 25‐percent chance that the stock will trade for $85 in one year, and a 75‐percent chance that the price will increas...

Q: Briefly state all the factors that affect the value of a call

Briefly state all the factors that affect the value of a call option and a put option.

Q: 1. Which of the following statements about a call option is

1. Which of the following statements about a call option is false? a. A call option is the right, not the obligation, to buy the underlying asset. b. A call option is in the money if the asset price i...

Q: Explain why the payoff from a call option is non-linear

Explain why the payoff from a call option is non-linear.

Q: FinCorp Inc. has both a call option and a put option

FinCorp Inc. has both a call option and a put option with exercise prices of $50. Both expire in one year. The call is currently selling for $10 per share, while the put is currently selling for $2 pe...

Q: The CFO of CanGold Company is considering investing in a gold mine

The CFO of CanGold Company is considering investing in a gold mine in Mongolia. The mine will cost $200 million to get into production and will last for one year. At the end of one year, it is expecte...

Q: Carol Krebs is considering buying 100 shares of Sooner Products Inc.

Carol Krebs is considering buying 100 shares of Sooner Products Inc. at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the p...

Q: A 6-month call option on 100 shares of SRS Corp

A 6-month call option on 100 shares of SRS Corp. stock is selling for $320. The strike price for the option is $80. The stock is currently selling at $79 per share. Ignoring brokerage fees, what price...

Q: The current price of a stock is $33, and the

The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a...

Q: Consider the October 2015 IBM call and put options in Problem 3

Consider the October 2015 IBM call and put options in Problem 3. Ignoring any interest you might earn over the remaining few days’ life of the options: a. Compute the break-even IBM...

Q: In mid-February 2016, European-style options on the

In mid-February 2016, European-style options on the S&P 100 index (OEX) expiring in December 2017 were priced as follows: Given an interest rate of 0.40% for a December 2017 maturity (22 months...

Q: Suppose Amazon stock is trading for $500 per share, and

Suppose Amazon stock is trading for $500 per share, and Amazon pays no dividends. a. What is the maximum possible price of a call option on Amazon? b. What is the maximum possible price of a put optio...

Q: Explain why an American call option on a non-dividend-

Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart.

Q: Consider an American put option on XAL stock with a strike price

Consider an American put option on XAL stock with a strike price of $55 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest...

Q: The stock of Harford Inc. is about to pay a $

The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR (monthly co...

Q: Suppose the S&P 500 is at 900, and a

Suppose the S&P 500 is at 900, and a one-year European call option with a strike price of $400 has a negative time value. If the interest rate is 5%, what can you conclude about the dividend yield of...

Q: The current price of Estelle Corporation stock is $25. In

The current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year risk-free i...

Q: Roslin Robotics stock has a volatility of 30% and a current

Roslin Robotics stock has a volatility of 30% and a current stock price of $60 per share. Roslin pays no dividends. The risk-free interest is 5%. Determine the Black-Scholes value of a one year, at-th...

Q: Using the data in Table 21.1, compare the price

Using the data in Table 21.1, compare the price on July 24, 2009, of the following options on JetBlue stock to the price predicted by the Black-Scholes formula. Assume that the standard deviation of...

Q: Consider the at-the-money call option on Roslin Robotics

Consider the at-the-money call option on Roslin Robotics evaluated in Problem 11. Suppose the call option is not available for trade in the market. You would like to replicate a long position in 1000...

Q: Consider again the at-the-money call option on Roslin

Consider again the at-the-money call option on Roslin Robotics evaluated in Problem 11. What is the impact on the value of this call option of each of the following changes (evaluated separately)? a....

Q: Using the information in Problem 1, use the Binomial Model to

Using the information in Problem 1, use the Binomial Model to calculate the price of a oneyear put option on Estelle stock with a strike price of $25. Data from Problem 1: The current price of Estel...

Q: Using the information on Harbin Manufacturing in Problem 19, answer the

Using the information on Harbin Manufacturing in Problem 19, answer the following: a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike pr...

Q: Using the information in Problem 1, calculate the risk-neutral

Using the information in Problem 1, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 1: The current price of Estelle Corporation stock is $25. In each o...

Q: Using the information in Problem 3, calculate the risk-neutral

Using the information in Problem 3, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 3: The current price of Natasha Corporation stock is $6. In each of...

Q: Calculate the beta of the January 2010 $9 call option on

Calculate the beta of the January 2010 $9 call option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of inte...

Q: The current price of Natasha Corporation stock is $6. In

The current price of Natasha Corporation stock is $6. In each of the next two years, this stock price can either go up by $2.50 or go down by $2. The stock pays no dividends. The one-year risk-free in...

Q: Using the information in Problem 3, use the Binomial Model to

Using the information in Problem 3, use the Binomial Model to calculate the price of a twoyear European put option on Natasha stock with a strike price of $7. Data from Problem 3: The current price...

Q: Hema Corp. is an all equity firm with a current market

Hema Corp. is an all equity firm with a current market value of $1000 million (i.e., $1 billion), and will be worth $900 million or $1400 million in one year. The risk-free interest rate is 5%. Suppos...

Q: Suppose the current exchange rate is $1.80/£, the

Suppose the current exchange rate is $1.80/£, the interest rate in the United States is 5.25%, the interest rate in the United Kingdom is 4%, and the volatility of the $/£ exchange rate is 10%. Use th...

Q: Indicate the difference between a call option and a put option.

Indicate the difference between a call option and a put option.

Q: The treasurer of Hing Wa Corp. has read on the Internet

The treasurer of Hing Wa Corp. has read on the Internet that the stock price of Ewing Inc. is about to take off. In order to profit from this potential development, Hing Wa purchased a call option on...

Q: On January 2, 2017, Jackson Corporation purchased a call option

On January 2, 2017, Jackson Corporation purchased a call option for $500 on Walter’s common shares. The call option gives Jackson the option to buy 1,000 shares of Walter at a strike price of $30 per...

Q: On April 1, 2017, Petey Ltd. paid $175

On April 1, 2017, Petey Ltd. paid $175 for a call to buy 700 shares of NorthernTel at a strike price of $27 per share any time during the next six months. The market price of NorthernTel’s shares was...

Q: Refer to P16-1, but assume that Hing Wa wrote

Refer to P16-1, but assume that Hing Wa wrote (sold) the call option for a premium of $480 (instead of buying it). Assume that the market price of the shares and the fair value of the option are other...

Q: Chatham Inc. purchased an option to buy 10,000 of

Chatham Inc. purchased an option to buy 10,000 of its common shares for $35 each. The option cost $750, and explicitly stipulates that it may only be settled by exercising the option and buying the sh...

Q: Mavis Corporation is a new audit client of yours and has not

Mavis Corporation is a new audit client of yours and has not reported earnings per share data in its annual reports to shareholders in the past. The treasurer, Andrew Benninger, has asked you to provi...

Q: On May 9, 2018, Glenna purchases 500 shares of Ignaz

On May 9, 2018, Glenna purchases 500 shares of Ignaz Company stock for $7,500. On June 30, 2018, she writes a call option on the stock, giving the grantee the right to buy the stock for $9,000 during...

Q: On January 2, 2020, Jackson Corporation purchased a call option

On January 2, 2020, Jackson Corporation purchased a call option for $500 on Walter's common shares. The call option gives Jackson the option to buy 1,000 shares of Walter at a strike price of $30 per...

Q: On April 1, 2020, Petey Ltd. paid $175

On April 1, 2020, Petey Ltd. paid $175 for a call to buy 700 shares of NorthernTel at a strike price of $27 per share any time during the next six months. The market price of NorthernTel's shares was...

Q: Refer to P16.1, but assume that Hing Wa wrote

Refer to P16.1, but assume that Hing Wa wrote (sold) the call option for a premium of $480 (instead of buying it). Assume that the market price of the shares and the fair value of the option are other...

Q: The treasurer of Hing Wa Corp. has read on the Internet

The treasurer of Hing Wa Corp. has read on the Internet that the stock price of Ewing Inc. is about to take off. In order to profit from this potential development, Hing Wa purchased a call option on...

Q: Refer to Table 23.2 in the text to answer this

Refer to Table 23.2 in the text to answer this question. Suppose you purchase the July 2020 call option on corn futures with a strike price of $3.25. Assume you purchased the option at the last price....

Q: T-bills currently yield 3.4 percent. Stock in

T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $67 per share. There is no possibility that the stock will be worth less than $60 per share in one year. a...

Q: Suppose a share of stock sells for $54. The risk

Suppose a share of stock sells for $54. The risk-free rate is 5 percent, and the stock price in one year will be either $60 or $70. a. What is the value of a call option with an exercise price of $60...

Q: The price of Chive Corp. stock will be either $57

The price of Chive Corp. stock will be either $57 or $84 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent. a. Suppose the current price...

Q: The price of Cilantro, Inc., stock will be either $

The price of Cilantro, Inc., stock will be either $60 or $80 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent. a. Suppose the current p...

Q: A one-year call option contract on Cheesy Poofs Co.

A one-year call option contract on Cheesy Poofs Co. stock sells for $725. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current v...

Q: A call option with an exercise price of $25 and four

A call option with an exercise price of $25 and four months to expiration has a price of $3.10. The stock is currently priced at $25.19, and the risk-free rate is 2.5 percent per year, compounded cont...

Q: A call option has an exercise price of $70 and matures

A call option has an exercise price of $70 and matures in six months. The current stock price is $73, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

Q: In addition to the five factors discussed in the chapter, dividends

In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is: All of the variables are the same as...

Q: A stock is currently selling for $73 per share. A

A stock is currently selling for $73 per share. A call option with an exercise price of $70 sells for $5.27 and expires in three months. If the riskfree rate of interest is 2.6 percent per year, compo...

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $45 sells for $4.84. The stock is currently priced at $43, and the risk-free rate is 3.5 percent per year, compounded continuously. Wh...

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $65 and three months to expiration sell for $5.27 and $1.04, respectively. If the risk-free rate is 3.1 percent per year, compounded continuous...

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $58 Exercise price = $60 Risk-free rate = 2.7% per year, compounded continuously Maturity = 4 mo...

Q: What are the deltas of a call option and a put option

What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?

Q: On May 9, 2021, Glenna purchases 500 shares of Ignaz

On May 9, 2021, Glenna purchases 500 shares of Ignaz Company stock for $7,500. On June 30, 2021, she writes a call option on the stock, giving the grantee the right to buy the stock for $9,000 during...

Q: Tyrell Company issued callable bonds with a par value of $10

Tyrell Company issued callable bonds with a par value of $10,000. The call option requires Tyrell to pay a call premium of $500 plus par (or a total of $10,500) to bondholders to retire the bonds. On...

Q: On July 1, Aloha Co. exercises a call option that

On July 1, Aloha Co. exercises a call option that requires Aloha to pay $408,000 for its outstanding bonds that have a carrying value of $416,000 and a par value of $400,000. The company exercises the...

Q: Which security should sell at a greater price? a.

Which security should sell at a greater price? a. A 10-year Treasury bond with a 4% coupon rate versus a 10-year T-bond with a 5% coupon. b. A 3-month expiration call option with an exercise price of...

Q: Turn back to Table 2.6 and look at the Microsoft

Turn back to Table 2.6 and look at the Microsoft options. Suppose you buy a January expiration call option with exercise price $100. a. Suppose the stock price in January is $103. Will you exercise yo...

Q: Suppose the risk-free interest rate is 6% per year

Suppose the risk-free interest rate is 6% per year. You are contemplating investing $107.55 in a 1-year CD and simultaneously buying a call option on the stock market index fund with an exercise price...

Q: Explain the difference between a call option and a long position in

Explain the difference between a call option and a long position in a futures contract.

Q: a. Consider a bullish spread option strategy using a call option

a. Consider a bullish spread option strategy using a call option with a $25 exercise price priced at $4 and a call option with a $40 exercise price priced at $2.50. If the price of the stock increases...

Q: Michael Weber, CFA, is analyzing several aspects of option valuation

Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potenti...

Q: Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes

Joel Franklin is a portfolio manager responsible for derivatives. Franklin observes an Americanstyle option and a European-style option with the same strike price, expiration, and underlying stock. Fr...

Q: A stock index is currently trading at 50. Paul Tripp,

A stock index is currently trading at 50. Paul Tripp, CFA, wants to value 2-year index options using the binomial model. The stock will either increase in value by 20% or fall in value by 20%. The ann...

Q: Calculate the value of a put option with exercise price $100

Calculate the value of a put option with exercise price $100 using the data in Problem 36. Show that put-call parity is satisfied by your solution. Problem 36: You are attempting to value a call opti...

Q: XYZ Corp. will pay a $2 per share dividend in

XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $60 per share. A European call option on XYZ has an exercise price of $55 and 3-month time to expiration. The ris...

Q: “The beta of a call option on FedEx is greater than

“The beta of a call option on FedEx is greater than the beta of a share of FedEx.” True or false?

Q: “The beta of a call option on the S&P

“The beta of a call option on the S&P 500 index with an exercise price of 2,430 is greater than the beta of a call on the index with an exercise price of 2,440.” True or false?

Q: Return to Problem 36. Value the call option using the risk

Return to Problem 36. Value the call option using the risk-neutral shortcut described in the box in Section 21.3. Confirm that your answer matches the value you get using the two-state approach. Prob...

Q: Return to Problem 38. a. What will be the

Return to Problem 38. a. What will be the payoff to the put, Pu, if the stock goes up? b. What will be the payoff, Pd, if the stock price falls? c. Value the put option using the risk-neutral shortcut...

Q: In each of the following questions, you are asked to compare

In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 4%. Assume the stocks on which thes...

Q: In this problem, we derive the put-call parity relationship

In this problem, we derive the put-call parity relationship for European options on stocks that pay dividends before option expiration. For simplicity, assume that the stock makes one dividend payment...

Q: Consider the following options portfolio. You write a February 8 expiration

Consider the following options portfolio. You write a February 8 expiration call option on Microsoft with exercise price $100. You write a February 8 put option with exercise price $95. a. Graph the p...

Q: You write a call option with X = 50 and buy a

You write a call option with X = 50 and buy a call with X = 60. The options are on the same stock and have the same expiration date. One of the calls sells for $3; the other sells for $9. a. Draw the...

Q: You think there is great upward potential in the stock market and

You think there is great upward potential in the stock market and would like to participate in the upward move if it materializes. However, you are not able to afford substantial stock market losses a...

Q: What are the trade-offs facing an investor who is considering

What are the trade-offs facing an investor who is considering writing a call option on an existing portfolio?

Q: The common stock of the C.A.L.L

The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price...

Q: We showed in the text that the value of a call option

We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example...

Q: a. Calculate the value of a call option on the stock

a. Calculate the value of a call option on the stock in Problem 9 with an exercise price of 110. b. Verify that the put-call parity theorem is satisfied by your answers to Problem 9 and part (a). (Do...

Q: Should the rate of return of a call option on a long

Should the rate of return of a call option on a long-term Treasury bond be more or less sensitive to changes in interest rates than is the rate of return of the underlying bond?

Q: Consider a 6-month expiration European call option with exercise price

Consider a 6-month expiration European call option with exercise price $105. The underlying stock sells for $100 a share and pays no dividends. The risk-free rate is 5%. What is the implied volatility...

Q: A collar is established by buying a share of stock for $

A collar is established by buying a share of stock for $50, buying a 6-month put option with exercise price $45, and writing a 6-month call option with exercise price $55. On the basis of the volatili...

Q: You are very bullish (optimistic) on stock EFG, much

You are very bullish (optimistic) on stock EFG, much more so than the rest of the market. In each question, choose the portfolio strategy that will give you the biggest dollar profit if your bullish f...

Q: You are attempting to value a call option with an exercise price

You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% cha...

Q: Consider an increase in the volatility of the stock in the previous

Consider an increase in the volatility of the stock in the previous problem. Suppose that if the stock increases in price, it will increase to $130, and that if it falls, it will fall to $70. Show tha...

Q: Assume a stock has a value of $100. The stock

Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year expiration sells for $7. If the annual...

Q: You buy a share of stock, write a 1-year

You buy a share of stock, write a 1-year call option with X = $10, and buy a 1-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. (a) What is the payoff of your...

Q: Netflux is selling for $100 a share. A Netflux call

Netflux is selling for $100 a share. A Netflux call option with one month until expiration and an exercise price of $105 sells for $2 while a put with the same strike and expiration sells for $6.94. W...

Q: Demonstrate that an at-the-money call option on a

Demonstrate that an at-the-money call option on a given stock must cost more than an at themoney put option on that stock with the same expiration. The stock will pay no dividends until after the expi...

Q: Suppose you think AppX stock is going to appreciate substantially in value

Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $100, and a call option expiring in one year has an...

Q: The common stock of the P.U.T.T

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You...

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

Use the Black-Scholes formula to find the value of a call option on the following stock: Time to expiration……………………………6 months Standard deviation………………………50% per year Exercise price………………………………………….$5...

Q: Recalculate the value of the call option in Problem 11, successively

Recalculate the value of the call option in Problem 11, successively substituting one of the changes below while keeping the other parameters as in Problem 11: a. Time to expiration = 3 months. b. Sta...

Q: A call option with X = $50 on a stock priced

A call option with X = $50 on a stock priced at S = $55 sells for $10. Using a volatility estimate of σ = .30, you find that N(d1) = .6 and N(d2) = .5. The risk-free interest rate is zero. Is the impl...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. eq...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. eq...

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.

Q: The hedge ratio of an at-the-money call option

The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is −.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: All else equal, is a call option on a stock with

All else equal, is a call option on a stock with a lot of firm-specific risk worth more than one on a stock with little firm-specific risk? The betas of the two stocks are equal.

Q: All else equal, will a call option with a high exercise

All else equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?

Q: Use the put-call parity relationship to demonstrate that an at

Use the put-call parity relationship to demonstrate that an at-the-money European call option on a non-dividend-paying stock must cost more than an at-the-money put option. Show that the prices of the...

Q: Show that Black-Scholes call option hedge ratios increase as the

Show that Black-Scholes call option hedge ratios increase as the stock price increases. Consider a 1-year option with exercise price $50, on a stock with annual standard deviation 20%. The T bill rate...

Q: On July 1, 20X1, Stan Getz, Inc., bought

On July 1, 20X1, Stan Getz, Inc., bought call option contracts for 500 shares of Selmer Manufacturing common stock. The contracts cost $200, expire on September 15, and have anexercise price of $40 pe...

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: 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: Calculate and compare the risk (betas) of the following investments

Calculate and compare the risk (betas) of the following investments: (a) a share of Amazon stock; (b) a one-year call option on Amazon; (c) a one-year put option; (d) a portfolio consisting of a share...

Q: Transit Airlines provides regional jet service in the Mid-South.

Transit Airlines provides regional jet service in the Mid-South. The following is information on liabilities of Transit at December 31, 2021. Transit’s fiscal year ends on December 31. Its annual fina...

Q: Shandra Corporation (a U.S.-based company) expects

Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot...

Q: Amaretta Company (a U.S.-based company) ordered

Amaretta Company (a U.S.-based company) ordered merchandise from a foreign supplier on November 20 at a price of 1,000,000 rupees when the spot rate was $0.050 per rupee. Delivery and payment were sch...

Q: Based on past experience, Maas Corp. (a U.

Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 francs on March 15, 2021. To hedge this forecasted transact...

Q: Pacifico Company, a U.S.-based importer of beer

Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest- style beer from a German supplier for 50,000 euros. Relevant U.S. dollar exchange rates for the euro are...

Q: Which security should sell at a greater price? a.

Which security should sell at a greater price? a. A 10-year Treasury bond with a 5% coupon rate or a 10-year T-bond with a 6% coupon. b. A three-month expiration call option with an exercise price o...

Q: Turn back to Figure 2.10 and look at the Microsoft

Turn back to Figure 2.10 and look at the Microsoft options. Suppose you buy a November expiration call option with exercise price $140.) a. If the stock price at option expiration is $144, will you e...

Q: What is the difference between a call option and a long position

What is the difference between a call option and a long position in a futures contract?

Q: Suppose you think AppX stock is going to appreciate substantially in value

Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $100, and the call option expiring in one year has...

Q: The common stock of the P.U.T.T

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You...

Q: You think there is great upward potential in the stock market and

You think there is great upward potential in the stock market and would like to participate in the upward move if it materializes. However, you cannot afford substantial stock market losses and so can...

Q: Consider the following options portfolio: You write a November 2019 expiration

Consider the following options portfolio: You write a November 2019 expiration call option on Microsoft with exercise price $140. You also write a November expiration Microsoft put option with exercis...

Q: You buy a share of stock, write a one-year

You buy a share of stock, write a one-year call option with X = $10, and buy a one-year put option with X = $10. Your net outlay to establish the entire portfolio is $9.50. What is the payoff of your...

Q: You write a call option with X = $50 and buy

You write a call option with X = $50 and buy a call with X = $60. The options are on the same stock and have the same expiration date. One of the calls sells for $3; the other sells for $9. a. Draw th...

Q: The following price quotations are for exchangelisted options on Primo Corporation common

The following price quotations are for exchangelisted options on Primo Corporation common stock. With transaction costs ignored, how much would a buyer have to pay for one call option contract?

Q: A call option with a strike price of $50 on a

A call option with a strike price of $50 on a stock selling at $55 costs $6.50. What are the call option’s intrinsic and time values?

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfo...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfo...

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

Use the Black-Scholes formula to find the value of a call option on the following stock: Time to expiration = 6 months Standard deviation = 50% per year Exercise price = $50 Stock price = $50 Interest...

Q: A put option on a stock with a current price of $

A put option on a stock with a current price of $33 has an exercise price of $35. The price of the corresponding call option is $2.25. According to put-call parity, if the effective annual risk-free r...

Q: All else being equal, is a call option on a stock

All else being equal, is a call option on a stock with a lot of firm-specific risk worth more than one on a stock with little firm-specific risk? The betas of the stocks are equal.

Q: All else being equal, will a call option with a high

All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?

Q: Should the rate of return of a call option on a long

Should the rate of return of a call option on a long-term Treasury bond be more or less sensitive to changes in interest rates than the rate of return of the underlying bond?

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.

Q: The hedge ratio (delta) of an at-the-

The hedge ratio (delta) of an at-the-money call option on IBM is 0.4. The hedge ratio of an at-themoney put option is − 0.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: A call option on Jupiter Motors stock with an exercise price of

A call option on Jupiter Motors stock with an exercise price of $75 and one-year expiration is selling at $3. A put option on Jupiter stock with an exercise price of $75 and one-year expiration is sel...

Q: Consider a six-month expiration European call option with exercise price

Consider a six-month expiration European call option with exercise price $105. The underlying stock sells for $100 a share and pays no dividends. The risk-free rate is 5%. What is the implied volatili...

Q: In this problem, we derive the put-call parity relationship

In this problem, we derive the put-call parity relationship for European options on stocks that pay dividends before option expiration. For simplicity, assume that the stock makes one dividend payment...

Q: A collar is established by buying a share of stock for $

A collar is established by buying a share of stock for $50, buying a six-month put option with exercise price $45, and writing a six-month call option with exercise price $55. Based on the volatility...

Q: You are attempting to value a call option with an exercise price

You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays no dividends, its current price is $100, and you believe it has a 50% cha...

Q: Consider an increase in the volatility of the stock in the previous

Consider an increase in the volatility of the stock in the previous problem. Suppose that if the stock increases in price, it will increase to $130, and that if it falls, it will fall to $70. Show tha...

Q: We showed in the chapter that the value of a call option

We showed in the chapter that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the putcall parity relationship as well as a numerical...

Q: Use the put-call parity relationship to demonstrate that an at

Use the put-call parity relationship to demonstrate that an at-the-money European call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the...

Q: Return to Problem 35. Value the call option using the risk

Return to Problem 35. Value the call option using the risk-neutral shortcut described in the On the Market Front box. Confirm that your answer matches the value you get using the two-state approach.

Q: In each of the following questions, you are asked to compare

In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 6%. Assume the stocks on which thes...

Q: Show that Black-Scholes call option hedge ratios increase as the

Show that Black-Scholes call option hedge ratios increase as the stock price increases. Consider a one-year option with exercise price $50 on a stock with annual standard deviation 20%. The Tbill rate...

Q: a. Calculate the value of a call option on the stock

a. Calculate the value of a call option on the stock in the previous problem with an exercise price of 110. b. Verify that the put-call parity relationship is satisfied by your answers to both Proble...

Q: Which one of the following statements about the value of a call

Which one of the following statements about the value of a call option at expiration is false? a. A short position in a call option will result in a loss if the stock price substantially exceeds the...

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

Use the Black-Scholes formula to find the value of a call option based on the following inputs.(Round your final answer to 2 decimal places. Do not round intermediate calculations.) Call value

Q: You observe a premium of $7.14 for a call

You observe a premium of $7.14 for a call option on Birdwell Enterprises common stock, which is currently selling for $48.00. The strike price on the call option is $50.00. The option has four months...

Q: Calculate the elasticity of a call option with a premium of $

Calculate the elasticity of a call option with a premium of $6.00 and a strike price of $73.00. The call has a hedge ratio of .7, and the underlying stock’s price is currently $71.00. (Round your answ...

Q: You want to buy a stock that is currently selling for $

You want to buy a stock that is currently selling for $60. You forecast that in one year, the stock’s price will be either $110 or $20, with equal probabilities. There is a one-year call option on the...

Q: Michael Weber, CFA, is analyzing several aspects of option valuation

Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potenti...

Q: Several months ago you purchased a call option on a crude oil

Several months ago you purchased a call option on a crude oil futures contract with an exercise price of $6,300. Today is the expiration date, and the futures price is $6,350. a.Will you exercise th...

Q: Suppose that you purchased a conventional call option on growth in Non

Suppose that you purchased a conventional call option on growth in Non-Farm Payrolls (NFP) with an exercise price of 200,000 jobs. The NFP conventional contract pays out $100 for every job created in...

Q: A stock index is currently trading at 50. Paul Tripp,

A stock index is currently trading at 50. Paul Tripp, CFA, wants to value two-year index options using the binomial model. In any year, the stock will either increase in value by 20% or fall in value...

Q: On July 1, 2020, Lester Shoes Ltd. exercises a

On July 1, 2020, Lester Shoes Ltd. exercises a $4,000 call option on its outstanding bonds, which have a carrying value of $206,000 and par value of $200,000. Lester exercises the call option immediat...

Q: A European call option gives a person the right to buy a

A European call option gives a person the right to buy a particular stock at a given price (the strike price) on a specific date in the future (the expiration date). This type of call option is typica...

Q: Refer to the previous question. Another type of option is the

Refer to the previous question. Another type of option is the Asian option. Its payoff is not based on the price of the stock on the expiration date but, instead, on the average price of the stock ove...

Q: Randy Rudecki purchased a call option on British pounds for $0

Randy Rudecki purchased a call option on British pounds for $0.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units...

Q: Mike Suerth sold a call option on Canadian dollars for $0

Mike Suerth sold a call option on Canadian dollars for $0.01 per unit. The strike price was $0.76, and the spot rate at the time the option was exercised was $0.82. Assume Mike did not obtain Canadian...

Q: Myrtle Beach Co. purchases imports that have a price of 400

Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $0.50...

Q: Reska, Inc., has constructed a long euro straddle. A

Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $0.025 per unit. A euro put option has a premium of $0.017 per un...

Q: Differentiate between a currency call option and a currency put option.

Differentiate between a currency call option and a currency put option.

Q: Maggie Hawthorne is a currency speculator. She has noticed that recently

Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a...

Q: A call option on British pounds (£) exists with a strike price

A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $0.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of...

Q: On July 2, the two-month futures rate of the

On July 2, the two-month futures rate of the Mexican peso contained a 2 percent discount (unannualized). A call option on pesos was available with an exercise price that was equal to the spot rate. In...

Q: This morning, a Canadian dollar call option contract has a $

This morning, a Canadian dollar call option contract has a $0.71 strike price, a premium of $0.02, and an expiration date of one month from now. This afternoon, news about international economic condi...

Q: At 10:30 a.m., the media reported news

At 10:30 a.m., the media reported news that the Mexican government’s political problems had decreased, which reduced the expected volatility of the Mexican peso against the dollar over the next month....

Q: The spot rate of the New Zealand dollar is $0.

The spot rate of the New Zealand dollar is $0.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.78 and a premium of $0.04. A put option on New Zealan...

Q: When would a U.S. firm consider purchasing a call

When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging

Q: When should a speculator purchase a call option on Australian dollars?

When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

Q: List the factors that affect currency call option premiums, and briefly

List the factors that affect currency call option premiums, and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium t...

Q: As of 10:00 a.m., the premium on

As of 10:00 a.m., the premium on a specific one-year call option on British pounds is $0.04. Assume that the Bank of England had not been intervening in the foreign exchange markets in the last severa...

Q: The U.S. three month interest rate (unannualized)

The U.S. three month interest rate (unannualized) is 1 percent. The Canadian three-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period...

Q: You apply a regression model to annual data in which the annual

You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as annual U.S. inflation minus U.K. inflation) is the...

Q: Indiana Co. expects to receive 5 million euros in one year

Indiana Co. expects to receive 5 million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $1.10. Interest rate parity e...

Q: Red River Co. (a U.S. firm)

Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payable...

Q: Assume interest rate parity exists. Today the one-year interest

Assume interest rate parity exists. Today the one-year interest rate in Canada is the same as the one-year interest rate in the United States. Utah Co. uses the forward rate to forecast the future spo...

Q: Today the spot rate of the euro is $1.20

Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the sp...

Q: Assume that the country of Dreeland has a currency (called the

Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the futur...

Q: Grady Co. is a manufacturer of hockey equipment in Chicago,

Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 perc...

Q: Blades, Inc. needs to order supplies two months ahead of

Blades, Inc. needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery d...

Q: Assume that interest rate parity exists. At 10:30 a

Assume that interest rate parity exists. At 10:30 a.m., the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso a...

Q: The price of Garner stock is $40. There is also

The price of Garner stock is $40. There is also a call option on Garner stock that is at the money, with a premium of $2.00. There is a put option on Garner stock that is at the money, with a premium...

Q: a. Evanston Insurance Inc. has purchased shares of Stock E

a. Evanston Insurance Inc. has purchased shares of Stock E at $50 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position...

Q: Wisconsin Inc. purchased a call option on Treasury bond futures at

Wisconsin Inc. purchased a call option on Treasury bond futures at a premium of 2-00. The exercise price is 92-08. If the price of the Treasury bond futures rises to 93-08, should Wisconsin Inc. exerc...

Q: Describe a call option on interest rate futures. How does it

Describe a call option on interest rate futures. How does it differ from purchasing a futures contract?

Q: A call option on Illinois stock specifies an exercise price of $

A call option on Illinois stock specifies an exercise price of $38. Today’s price of the stock is $40. The premium on the call option is $5. Assume the option will not be exercised u...

Q: A call option on Michigan stock specifies an exercise price of $

A call option on Michigan stock specifies an exercise price of $55. Today the stock’s price is $54 per share. The premium on the call option is $3. Assume the option will not be exer...

Q: DePaul Insurance Company purchased a call option on a stock index futures

DePaul Insurance Company purchased a call option on a stock index futures contract. The option premium is quoted as $6. The exercise price is $1,430. Assume the index on the futures contract becomes $...

Q: Coral Inc. has purchased shares of stock M at $28

Coral Inc. has purchased shares of stock M at $28 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock....

Q: Use the following information to determine the probability distribution of net gains

Use the following information to determine the probability distribution of net gains per unit from purchasing a call option on British pounds: The spot rate of the British pound = $1.45 The premium on...

Q: Describe the general differences between a call option and a futures contract

Describe the general differences between a call option and a futures contract.

Q: A stock trades for $45 per share. A call option

A stock trades for $45 per share. A call option on that stock has a strike price of $50 and an expiration date one year in the future. The volatility of the stock’s return is 30%, and the risk-free ra...

Q: Repeat the analysis of Problem 14.18, assuming that the

Repeat the analysis of Problem 14.18, assuming that the volatility of the stock’s return is 40%. Intuitively, would you expect this to cause the call price to rise or fall? By how much does the call p...

Q: John has been following the stock market very closely over the past

John has been following the stock market very closely over the past 18 months and has a strong belief that future stock prices will be significantly higher. He has two alternatives that he can follow....

Q: A six-month call option contract on 100 shares of Home

A six-month call option contract on 100 shares of Home Depot common stock with a strike price of $50 can be purchased for $500. Assuming that the market price of Home Depot stock rises to $65 per shar...

Q: Suppose that a call option with a strike price of $45

Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%. Use...

Q: With regard to futures options, how much profit would an investor

With regard to futures options, how much profit would an investor make if he or she bought a call option on gold at 7.20 when gold was trading at $482 an ounce, given that the price of gold went up to...

Q: Karen Kline purchased 200 shares of Mex Inc. common stock for

Karen Kline purchased 200 shares of Mex Inc. common stock for $10 per share exactly two years ago, in December 2017. Today, December 15, 2019, the stock is selling for $18 per share. Because Karen str...

Q: Hal and Terri Wilson had most of their funds invested in common

Hal and Terri Wilson had most of their funds invested in common stock in late 2019. The Wilsons didn’t really do very much investment planning, and they had practically no background...

Q: Briefly explain how you would make money on (a) a

Briefly explain how you would make money on (a) a call option and (b) a put option. Do you have to exercise the option to capture the profit?

Q: A European call option on a stock earns the owner an amount

A European call option on a stock earns the owner an amount equal to the price at expiration minus the exercise price, if the price of the stock on which the call is written exceeds the exercise price...

Q: Repeat parts a–d of the problem 24 for a six

Repeat parts a–d of the problem 24 for a six-month European put option with exercise price $40. Again, assume a current stock price of $35, a risk-free rate of 5%, and an annual volatility of 40%. Da...

Q: A knockout call option loses all value at the instant the price

A knockout call option loses all value at the instant the price of the stock drops below a given “knockout level.” Determine a fair price for a knockout call option when the current stock price is $20...

Q: How many ExxonMobil May 2020 $40.00 put options were

How many ExxonMobil May 2020 $40.00 put options were outstanding at the open of trading on March 13, 2020? b. What was the settlement price of a 10-year Treasury note May 138.00 futures call option...

Q: Return to the WTM case in the chapter where it is said

Return to the WTM case in the chapter where it is said that WTM could hedge its exposure to the price risk of copper by purchasing a call option for $336 that would give it the right to buy one ton of...

Q: A 3-month European call option on VHQ shares trades at

A 3-month European call option on VHQ shares trades at $5. Its exercise price is $50 and the stock price is currently $50.50. a. Using the put-call parity relationship, calculate the price of a put on...