You owe someone £10,000,000 deliverable in 1 year. The current spot is $1.20/£. You have calculated that your profitability breakeven price is $12 million. How can you hedge this exposure using options and ensure that you at least breakeven? A. Sell call options with a strike price = $1.20/£ B. Buy call options with a strike price = $1.20/£ C. Sell put options with a strike price = $1.20/£ D. Buy put options with a strike price = $1.20/£ 0% 0% 0% 09

You owe someone £10,000,000 deliverable in 1 year. The current spot is $1.20/£. You have calculated that your profitability breakeven price is $12 million. How can you hedge this exposure using options and ensure that you at least breakeven? A. Sell call options with a strike price = $1.20/£ B. Buy call options with a strike price = $1.20/£ C. Sell put options with a strike price = $1.20/£ D. Buy put options with a strike price = $1.20/£ 0% 0% 0% 09

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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Similar questions

Consider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90. (a) Calculate the value of the put option using the risk-neutral valuation relationship (RNVR). Explain the reasoning behind your calculations.
Consider a put option on a stock that curretly sclls for £100, but may rise to £120 or fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90. (a) Calculate the value of the put option using the risk-neutral valuation relationship (RNVR). Explain the reasoning behind your calculations. (b) Calculate the value of the put option by using first principles (No Arbitrage prin- ciples). Explain the reasoning behind your calculations. (c) What is the price of a call option on the same stock with the same exercise price and the same expiration date? Explain the reasoning behind your calculations.
Consider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90. (b) Calculate the value of the put option by using first principles (No Arbitrage prin- ciples). Explain the reasoning behind your calculations.
A call option has X=$52 and expire in 360 days (suppose we have 360 days in one year). The risk-free rate is 4%. The call is priced at $11. A put option has X-$52 and is priced at $1. The underlying asset is priced at S0=$43. Suppose in our investments, we could involve one call, one put, one bond, and on stock. How much arbitrage profit could we possibly obtain?
You've decided that index put options are attractive to sell. For simplicity, assume the current S&P500 index level is 100 and the risk-free rate is 1%. You sell one S&P500 index European put option with a strike of 96 and a one-month maturity. The implied volatility of the option is 23% and the price is $1.048 (i.e., you receive this amount in cash from the option sale). You believe that the annual expected return of the S&P500 index will be 6% with a volatility of 18%. What is your expected return from your sale? 49.45% O 1.65% 19.45% O -5.65%
Consider a put option on a stock that currently sells for £100, but may rise to £120 or fall to £80 after 1 year. The risk free rate of return is 10%, and the exercise price is £90. (c) What is the price of a call option on the same stock with the same exercise price and the same expiration date? Explain the reasoning behind your your calculations.
You've decided that index put options are attractive to sell. For simplicity,- assume the current S&P500 index level is 100 and the risk-free rate is 1%. You sell one S&P500 index European put option with a strike of 100 and a three-month maturity. The implied volatility of the option is 23% and the price is $4.4558 (i.e., you receive this amount in cash from the option sale). You believe that the annual expected return of the S&P500 index will be 8% with a volatility of 20%. What is your expected return from your sale? 45.2% 22.1% -11.1% 30.5%
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank. The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.
Suppose you buy a one-year European call option on Apple with an exercise price of $100 and sell a one-year put option with the same exercise price. The current stock price is $100, and the interest rate is 10%. Draw a position diagram showing the payoffs from your investments. How much will the combined position cost you?
You are considering an investment that will pay you $2,500 in one year, $5,000 in two years and $10,000 in three years. If investors require a return of 19%, what price should it sell for? Question 6 options: 10,224.81 12,153.78 14,219.44 16,533.89 11,565.82
If you were to write a call option on XYZ (with a strike price of $100) AND also write a put option on XYZ (with a strike price of $100), each within six months maturity, what type of bet are you making? 1.XYZ will go up 2.XYZ will go down 3. Volatility of XYZ will increase 4. Volatility of XYZ will decrease
You are interested to value a put 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 either increases to $120 or decreases to $80. The risk-free rate of interest is 10%. Calculate the put option's value using the binomial pricing model, presenting your calculations and explanations as follows: a. Draw tree-diagrams to show the possible paths of the share price and put payoffs over one year period. (Note: Show the numbers that are known and use letter(s) for what is unknown in your diagrams.) b. Compute the hedge ratio. c. Find the put option price. Explain your calculations clearly. d. Use put-call parity, find the price of a call option with the same exercise price and the same expiration date.

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