Suppose you buy a Merck put for$2.50 which matures in Septemberwith a strike price of $50. Merck iscurrently trading at $51.75. If thestock price of Merck falls to $46, therate of return of your put option is:O 60%O 70%Ⓒ 120%10%

gain for put = strike price - stock price = 50-46 =4

Answered: stock price of Merck falls to $46, rate…

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stock price of Merck falls to $46, rate of return of your put option is

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Suppose you buy a Merck put for
$2.50 which matures in September
with a strike price of $50. Merck is
currently trading at $51.75. If the
stock price of Merck falls to $46, the
rate of return of your put option is:
O 60%
O 70%
Ⓒ 120%
10%

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