You sell a put option on ABC stock for $2.25 with a strike price of $50. Today, ABC is trading at $53. The holder of the option chooses to exercise. What is your return? (Use $2.25 as initial equity invested) 80% 100% 133% -60%

You sell a put option on ABC stock for $2.25 with a strike price of $50. Today, ABC is trading at $53. The holder of the option chooses to exercise. What is your return? (Use $2.25 as initial equity invested) 80% 100% 133% -60%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 4P: Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call...

See similar textbooks

Related questions

Q: B i l l A n t i o j o i s p r e p a r i n g h i s b a l a n c e s h e e t a n d i n c…

A: Based on the nature of transaction the entries are classified as asset , liability , revenue and…

Q: Starting in 20 years, you will need to spend $600 per quarter on fashion to keep up with trends over…

A: The idea of the time value of money (TVM) holds that a quantity of income is valuable currently more…

Q: Problem 8-23 Dividend Initiation and Stock Value (LG8-6) A firm does not pay a dividend. It is…

A: Dividend in year 3 = d3 = $0.30 Growth rate = g = 11% Discount rate = 12%

Q: Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit…

A: Standard deviation is a measure of the spread of a dataset, defined as the square root of its…

Q: Sports Haven keeps an inventory of FITBIT Wearable Technology. Assume an inventory of 35 FitBits at…

A: FIFO is first in first out method of inventory management and valuation, under which inventories…

Q: The Milton Company currently purchases an average of $27,000 per day in raw materials credit terms…

A: Current level of trade credit = Average purchases per day x Credit period

Q: ABC Company currently has a capital structure consisting of 41% debt and the remaining as equity, a…

A: Levered beta calculates a company's exposure to market volatility when it has debt and equity in its…

Q: Approximately what interest rate would be needed in order to grow and investment of $1400 to $2500…

A: The interest rate that will grow a given investment into a target value over the length of…

Q: Present Value Computations Assuming that money is worth 10%, compute the present value of: 1.…

A: The present value represents the current worth of the future expected stream of cash flows…

Q: Is Walmart operating at an optimal capital structure?

A: Determining whether Walmart is operating at an optimal capital structure requires an analysis of the…

Q: Anderson Systems is considering a project that has an initial cash outflow of $1 million and…

A: Net present value (NPV) is a financial metric that calculates the present value of expected cash…

Q: A tire store advertises all tires at a 25% discount. Find the original price of a tire with a sales…

A: Discounts are generally offered and given to buyers in order to promote sales. It can be cash…

Q: The financial statements of Eagle Sport Supply are shown in the table below. For simplicity, "Costs"…

A: The growth rate represents the rate at which a variable changes over a period of time.

Q: Given the information in the table below, which company's stock has the highest total value?…

A: Total value of stock is the total price of stock multiplied by the number of shares outstanding of…

Q: ) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected…

A: . The equation of the Security Market Line (SML) is given by: Expected Return = Risk-Free Rate +…

Q: Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of…

A: A call option refers to a derivative instrument that provides the choice of purchasing the…

Q: Bond A is a coupon bond. It has a face value of $100. The coupon rate is 5%, and the market interest…

A: A bond is a kind of debt security issued by the government and private companies for raising funds…

Q: In a raffle where 3700 tickets are sold for $5 each, one first prize of $990 will be awarded. What…

A: Number of Tickets = 3700 Prize amount = $990

Q: 3. Scott deposits 80 today into an account that credits a nominal interest rate of 6% compounded…

A: Data given: Scott: PV=80 Rate=6% (compounded quarterly) =6%/4=1.5% N=18 years nper=18*4=72…

Q: Why is health insurance a necessity?

A: Health insurance is a type of insurance policy that coverage any medical expenses incurred owing to…

Q: cks A and B have the following historical returns: Year 2016 2017 2018 2019 2020 Stock A's Returns,…

A: The rate of return of a portfolio is the weighted average rate of return of all assets to be held in…

Q: 2 3 $550,000 $450,000 $300,000 The timeline of an investment is shown above. If the cost of capital…

A: The profitability index represents a measure used in capital budgeting to determine the…

Q: For the given cash flows, suppose the firm uses the NPV decision rule. Year Cash Flow 0123 a. b. -$…

A: Cash flow for year 0 = cf0 = -$150,000 Cash flow for year 1 = cf1 = $66,000 Cash flow for year 2 =…

Q: (a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM).

A: The capital of set price in model is a method that is used to describe the relationship between the…

Q: An investor is choosing between three investment strategies: invest all her money into project A…

A: As per our guidelines, we are supposed to answer only 3 sub-parts (if there are multiple sub-parts…

Q: Round your answer to the nearest penny. Input dollars and cents. 1. Frankie earned $28,700 last…

A: Social Security tax-This tax is levied on employees as well as on employers and the tax so…

Q: Zinc Corporation is developing its cash budget for this month. Each month, the firm manufactures and…

A: Cash budget is that which consider all the cash transaction which is done during that period for…

Q: An investor with an investment horizon of eight years buys a bond with a modified duration of 8.…

A: The duration GAP is the difference between the duration of a portfolio of assets and the duration of…

Q: 4. Answer all parts of this question. (a) A trader observes an American option and a European option…

A: The option are said to be the contract which give the holder the diet to exercise the contract. The…

Q: Identify the incorrect statement concerning lease finance. A. Companies that are short of…

A: Several statements have been provided regarding lease finance. The incorrect statement has to be…

Q: A company has an operating profit or EBIT of $771,000 in 2019 and paid interest totalling $54,000.…

A: Earning Before Interest and Tax = EBIT = $771,000 Interest Expenses = i = $54,000 Tax rate = t = 35%

Q: Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of…

A: Capital budgeting is to find investment possibilities that can yield a profit, add value to the…

Q: Analysis of 60 monthly rates of return on United Futon common stock indicates a beta of 1.65 and an…

A: Beta = b = 1.65 Alpha = a = -0.40% Market rate = m = 7% Actual return = 8%

Q: Stocks A and B have a required return of 14%. Stock A has a dividend yield of 8%. Stock B has a…

A: The required return is the total return on holding a stock. The capital gains yield is calculated…

Q: Consider the following information on two stocks: P(State) Stock A Stock B Boom 20% 30%…

A: Standard deviation refers to the method that is used for measuring the deviation of data of stock…

Q: What present value amounts to $23,513.44 if it is invested for 6 years at 10% compounded quarterly?

A: Present value is the estimation of the current value of future cash value which is likely to be…

Q: Q6. A. Define break even analysis. B. Calculate NPV and IRR from data given below Project B $50000…

A: NPV represents the value generated by a project in regard to absolute profitability. IRR represents…

Q: A new furniture set costs $ 3200. If you make a down payment of $ 400 and finance the rest at a rate…

A: Repayment amount refers to the total amount taht is being paid for the repayment of the amount…

Q: a. Use the appropriate formula to determine the periodic deposit. b. How much of the financial goal…

A: Compound = quarterly = 4 Interest rate = r = 4.5 / 4 = 1.125% Time = t = 5 * 4 = 20 Future value =…

Q: Draw the profit diagram of the portfolio above (and clearly state any assumptions you make).Recall…

A: For a position involving long and short positions in various call options, the payoff diagram and…

Q: 4c) State the effect, if any, of each of the following three variables on the value of a call…

A: i) Effect of Call option when short-term Interest rate increases: When the interest rate increases,…

Q: State the effect, if any, of each of the following three variables on the valueof a call option. (No…

A: i) Effect of Call option when short-term Interest rate increases: When the interest rate increases,…

Q: Thanks to acquisition of a key patent, your company now has exclusive production rights for…

A: The difference between the current value of cash inflows and outflow of cash over a period of time…

Q: Estimating Share Value Using the DCF Model Following are forecasted sales, NOPAT, and NOA for…

A: DCF stands for Discounted Cash Flow, which is a financial valuation method used to estimate the…

Q: You are investing money at 5.7 percent annual interest, compounded continuously. It will take you…

A: We need the answer in years, therefore, we must find the effective annual rate for the continuous…

Q: What present value amounts to $8688.26 if it is invested for 2 years at 11% compounded every 4…

A: The PV of an investment refers to the value of all the future cash flows that the investment…

Q: The following is the dollar Price of a bond that has no maturity, that pays $80/ ear in column A.…

A: Bonds are fixed-income assets that serve as a representation of investor loans to borrowers…

Q: Vital Enterprises is considering two mutually exclusive projects, X and Y. The initial cost for X is…

A: Incremental Internal Rate of Return (IRR) is a capital budgeting technique used to evaluate the…

Q: 1. Consider the returns of two shares, A and B, under three possible scenarios: Scenario I II III 6%…

A: Scenario Probability Stock A Stock B I 0.08 50 19 II…

Q: discuss the put-call parity of options on futures, and use it to value put options on futures.…

A: Put-call parity is a principle that applies to options trading and states that the price of a call…

Question

80%

100%

133%

-60%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction of the question

VIEW

Step 2: Calculation of Sellers return

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

In follow an Ito process with >0, a stock is worth $80 today, if the price of an option that pays the holder $2 exactly the first time the stock price reaches $200, what is the price of an option? Show all calculation.
You purchased a call option for $3.45 17 days ago. The call has a strike price of $45, and the stock is now trading for $51. If you exercise the call today, what will be your holding-period return? If you do not exercise the call today and it expires, what will be your holding-period return? Multiple Choice a.173.9%, −100% b.73.9%, −100% c. 57.5%, −173.9% d.73.9%, −57.5% e.100%, −100%
stock price is currently $100. you buy a put option with a strike price of $85 and premium $2.50 expiring in 6 months. how high should the stock price be on the expiration day for you to break even on this strategy? a. $102.50 b. $97.50 c. $87.50 d. $82.50
An investor wants to purchase a stock that sells for $48. What is the value of a one-year put option to buy the stock at $45, if debt currently yields 8% and the standard deviation of stock returns is 11%? a. $3.84 b. $6.68 c. $5.28 d. $3.00
You have the following share price of XYZ. DATE Price 2-Mar-2021 $100 3-Mar-2021 $60 4-Mar-2021 $40 5-Mar-2021 $100 Investor A bought 100 shares of XYZ on 2-Mar-2021 and sold all the shares on 5-Mar-2021. Which answer is the closest value to the geometric average rate of return for the investor? A. 15% B. 20% C. 25% D. 0%
Question 5: A call option on a stock that expires in a year has a strike price of $99. The current stock price is $100 and the one-year risk free interest rate is 10%. The price of this call is $6. a) Is arbitrage possible? What is the arbitrage position? b) do you het this minimum? Find the minimum arbitrage profit for this strategy. When
A call option (with shares as the underlying asset) was originally purchased for $0.91 and is now trading for $2.62. The exercise price is $35 and the underlying share is currently trading for $37.43. What is the time value of the option? A. $2.43 B. $-1.52 C. $2.62 D. $0.19
ABC Company's current stock price is $100. The risk-free rate is 4%. 38. The payoff to the holder of a call option on ABC with an exercise price of $200 is closest to: A. $100 if stock price at option expiration equals $200 B. Zero if stock price at option expiration equals $100 C. -S40 if stock price at option expiration equals $160
Suppose you purchase XYZ 100 shares of call option. Each option is with exercise price 124. Each option has a premium of 9. Suppose the XYZ stock at expiration is priced at 104. What is your total profit (or loss) from those 100 shares of investments?
What is the price of a $25 strike call? Assume S = $23.50, \sigma 0.24, г 0.055, the stock pays a 2.5%continuous dividend and the option expires in 45 days?
Q1. You have purchased a call option on Johnson & Johnson common stock. The option has an exercise price of $57.50 and J & J’s stock currently trades at $58.93. The option premium is $2.17 per contract. Calculate your net profit on the option if J & J’s stock price rises to $62.50 and your exercise the option. Calculate your net profit on the option if J & J’s stock price falls to $58.00 and your exercise the option. If J & J’s stock price falls to $58.00 show that it is more profitable to exercise than not exercise the option you have purchased.
1. The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months with u = 1.1 and d = 0.9. Each step is 3 months, the risk free rate is 8%. Group of answer choices $2.24 $2.64 $2.84 $2.44