The model value of put option calculated by using binomial model is 10. Hedge ratio is 4/9. If market price of call is Rs 8, which of the following is required to take arbitrage benefit? Select one: O a. Buy 4 stock and 9 put options O b. O c. O d. Buy 9 stocks and buy 4 puts Buy 4 stocks and sell short 9 stocks Write 4 puts and sell short 9 stocks

The model value of put option calculated by using binomial model is 10. Hedge ratio is 4/9. If market price of call is Rs 8, which of the following is required to take arbitrage benefit? Select one: O a. Buy 4 stock and 9 put options O b. O c. O d. Buy 9 stocks and buy 4 puts Buy 4 stocks and sell short 9 stocks Write 4 puts and sell short 9 stocks

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

Problem 1PS

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You are evaluating a put option based on the following information: P = Ke-H•N(-d,) – S-N(-d,) Stock price, So Exercise price, k = RM 11 = RM 10 = 0.10 Maturity, T= 90 days = 0.25 Standard deviation, o = 0.5 Interest rate, r Calculate the fair value of the put based on Black-Scholes pricing model. Cumulative normal distribution table is provided at the back.
We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80.a. Show that the range of S is 50, whereas that of P is 30 across the two states. What is the hedge ratio of the put?b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio?c. What is the present value of the portfolio?d. Given that the stock currently is selling at 100, solve for the value of the put.
You are using a two-step binomial tree to estimate the price of a put option on MCD. The strike price of the put option is $22. The price of MCD today is $32. The risk-free rate is 5%. What is the price of the put? Round your solution to the nearest three decimals if needed (Le. 2.312). Please do not type the $ symbol. u-3 d= 0.59 Click on the arrow next to the file below. Next, create a new sheet in the Respondus LockDown Browser spreadsheet. You can use this blank spreadsheet to calculate the answer. Blank Spreadsheet.xisx
2. Derive the single - period binomial model for a put option. Include a single - period example where: u = 1.10, d = 0.95, Rf = 0.05, SO = $100, X = $100. 3. Assume ABC stock's price follows a binomial process, is trading at SO = $100, has u 1.10, d = 0.95, and probability of its price increasing in one period is 0.5 (q = 0.5). a. Show with a binomial tree ABC's possible stock prices, logarithmic returns, and probabilities after one period and two periods. . b. What are the stock's expected logarithmic return and variance for 2 periods and 3 periods? c. Define the properties of a binomial distribution.
4. Consider a stock with a current price of S0 = $60. The value of the stock at time t = 1 can take one of two values: S1,u = $100, S1,d = $40. The price of a risk-free bond that pays out $1 in period t = 1 is $0.90. (a) Using a one-step binomial tree, write down the possible payoffs of a put option on stock S with strike K = $60 and maturity t = 1. (b) What is the price of this put option? (c) What is the price of a call option with strike K = $60 and maturity t = 1? Please use put-call parity to find the call price.
We will derive a two-state call option value in this problem. Data: S0 = $190; X = $200; 1 + r = 1.10. The two possibilities for ST are $220 and $120. The portfolio consists of 1 share of stock and 5 calls short. Required: a. The range of S is $100 while that of C is $20 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.) b. Calculate the value of a call option on the stock with an exercise price of $200. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Suppose that call options on a stock with strike prices $100 and $106 cost $8 and $5, respectively. How can the options be (the profits from option positions and the total profit).
A. An option is trading at $5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55? B. What type of option is this and how? C. With a delta of -.56, is this option ITM, ATM or OTM and how?
Suppose that put options on a stock with strike prices $18 and $20 cost $2 and $3.50, respectively. How can the options be used to create a bull spread? Construct atable that shows the profit and payoff for the spread.
Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify breakeven point d. What is the profit or loss when stock price is S60 at maturity e. Suppose you have this options position, should you exercise your right (if any) assuming that the stock price is $60 at maturity? Option Payoffs and Profits Long put $40 $20 $0 Option Payoff Option Profit Exerche Price $20 S40 $20 $40 S60 $80. Stock Price At Maturity Payoff and Profit
Data: So=102; X = 115; 1 + r=1.1. The two possibilities for ST are 146 and 84. Required: a. The range of S is 62 while that of P is 31 across the two states. What is the hedge ratio of the put? b. Form a portfolio of one share of stock and two puts. What is the (nonrandom) payoff to this portfolio? c. What is the present value of the portfolio? d. Given that the stock currently is selling at 102, calculate the put value. × Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D What is the present value of the portfolio? Note: Round your answer to 2 decimal places. Present value $ 146.00 x
V3. By looking at the sensivities of your portfolio to δs = -$2 and δσ = -1%, you decide to hedge delta, gamma and Vega risk of your portfolio with the underlying stock and two different options on the same asset with below data. Calculate the units of stock you need to trade to hedge away all delta, gamma and Vega risks of your portfolio.(Note that here you have to calculate the units of stock, Option A and Option B, but you will only submit the units of stock.)

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