We will derive a two-state put option value in this problem. Data: S = $130; X = $140; 1+r=1.10. The two possibilities for ST are $170and $95.Required:a. The range of S is $75 while that of P is $45 across the two states. What is the hedge ratio of the put? (Negative value should beindicated by a minus sign. Round your answer to 2 decimal places.)Hedge ratioesb. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2decimal places.)Nonrandom payoffc. What is the present value of the portfolio? (Round your answer to 2 decimal places.)Present value

Step 1: Compute for the hedge ratio Hedge ratio is the ratio or comparative value of an open…

Answered: We will derive a two-state put option…

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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We will derive a two-state put option value in this problem. Data: S0 = $180; X = $190; 1 + r = 1.10. The two possibilities for ST are $210 and $110.a. The range of S is $100 while that of P is $80 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) (The answer for this one is -.80) :)b. Form a portfolio of four shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.) c. What is the present value of the portfolio? (Round your answer to 2 decimal places.) d. Given that the stock currently is selling at $180, calculate the put value. (Do not round intermediate calculations and round your answer to 2 decimal places.)
1) Using the Black and Scholes formula, for each payoff compute the price, delta and probability of being exercised: 1a) A call, K=90, So=100, T=0.25, o=0.2 and r=0.01. 1b) A put, K=37, So=35, T=0.3, o=0.3 and r=0.02. 1c) A call, K=23, So=24, T=5 months, o=24% and r=2%. 1d) A call, K=95% of So, So=50, T=9 months, o=50% and r=3%. 1e) A put, K=97% of So, So=95, T=1 year, o=D30% and r=2%. 1f) An "at-the-money" straddle, So=95, T = 3 months, o=35% and r=2%.
Hydro Ottawa has two options for upgrading a natural gas power station to meet new government standards. Option 1: Hydro Ottawa will make the upgrades themselves. This is expected to cost $12,700 at the end of each month for 12 years. At the end of the operation (in 12 years) Hydro Ottawa expects to sell all equipment needed for the upgrade for $122,000. Option 2: Pay experienced contractors. This will cost $28,000 up front and $13,900 monthly (at the end of every month) for 15 years. Assume all interest is 3.72% compounded monthly. Round the answers to NPV (Option 1), and NPV (Option 2) to the nearest dollar. Round all other answers to two decimal places where applicable. 1) Find the net present value of option 1: P/Y = C/Y = N = I/Y = PV = PMT= FV = Payments (Cost) GA % Sale of equipment (Residual) GA GA LA %
Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0 decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Option A Option B $ $ LA Net Present Value Profitability Index Internal Rate of Return % %
Suppose the nominal rate of return is 0.085 and the risk-free rate is 0.010. What is the risk premium? Instruction: Round to two decimal places. E.g., if your answer is 0.0106465 or 1.06465%, you should type ONLY the number .01, neither 0.0106465, 0.0106, nor 1.065. Otherwise, Blackboard will treat it as a wrong answer.
Economics Compute (F/A,%13,20) using the closed-form formula and call that X Also approximate it; by applying linear interpolation between the values obtained from "compound interest factors" table for (F/A,%12,20) and (F/A,%15,20) and call that y. What is X- y? Choose the closest value to your answer. A 0 (B) 11.3664 c) -11.3664 D 1.2358 E) -1.2358
Consider a two-factor Arbitrage Pricing Theory (APT) model, T; = a; + b1,ifı + b2.i f2 + €i, with the following information Asset i Asset 1 0.07 0.50 0.25 Asset 2 0.15 1.10 0.75 Asset 3 0.20 b1,3 Hi b1i b2i 1.0 and the risk-free rate rp is 0.025. (a) Find the value of b13 to preclude arbitrage opportunity. (b) is an Asset 4 with 4 = 0.13, b14 = 0.8, and b2.4 = 0.4. Explain how you would exploit an arbitrage opportunity if there
Using the attached option pricing model and related data K = 45; St = 40 t = 4/12; r =03; SD/σ = 0.4; N = 0.07, calculate the value of the call option
Consider the following payoff table: DA: Decision Alternative. Decision Alternative Good Bad Probabilities State of Nature 0.6 DA1 -3.22 DA2 13.80 DA3 3.75 DA4 4.06 6.33 What is the Expected value under perfect Information (EVUPI)? (Please keep 2 decimals for your answer) Your Answer: Answer 0.4 5.21 -5.40 6.00
Economics Compute (F/A, %13,20) using the closed-form formula and call that X, Also approximate it; by applying linear interpolation between the values obtained from "compound interest factors" table for (F/A,%12,20) and (F/A,%15,20) and call that Y. What is X-y? Choose the closest value to your answer. A 11.3664 C 1.2358 D -1.2358 11.3664
The future value interest factor is calculated as: Select one: O a. None of the other options are correct O b. (1 + r)(t)
Suppose you want to establish a bullish spread strategy. The are two call options. The first one has X1=$50 and C1=$5. The second one has X2=$42 and C2=$6. When the underlying asset price is S(t)=$45, what is the profit from the strategy? What is the maximum profit of the strategy? What is the minimum payoff of the strategy?

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