Suppose the stock price is $40 and the effective annual interest rate is 8%. 1. Draw on a single graph payoff and profit diagrams for the following options: • 35-strike call with a premium of $9.12. 40-strike call with a premium of $6.22. • 45-strike call with a premium of $4.08. . 2. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

Suppose the stock price is $40 and the effective annual interest rate is 8%. 1. Draw on a single graph payoff and profit diagrams for the following options: • 35-strike call with a premium of $9.12. 40-strike call with a premium of $6.22. • 45-strike call with a premium of $4.08. . 2. Consider your payoff diagram with all three options graphed together. Intuitively, why should the option premium decrease with the strike price?

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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Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify break-even point d. What is the profit or loss when stock price is $60 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 ---- Exercise Price -$20 -$40 $0 $20 $40 $60 $80 Stock Price At Maturity Payoff and Profit
Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify break-even point d. What is the profitt or loss when stock price is $60 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 $40 Long call $20 $0 Option Payoff Option Profit ---- Exercise Price -$20 -$40 $0 $20 $40 $60 $80 Payoff and Profit
Label the following for this diagram: a. Name of options payoff b. Identify whether positive or negative premium c. Identify break-even point d. What is the profitt or loss when stock price is $60 at maturity e. If you have this option position, should you exercise your right (if any) assuming that the stock price is $60 at maturity? Option Payoffs and Profits $40 $20 $0 Option Payoff Option Profit --- Exercise Price -$20 -$40 $0 $20 $40 $60 $80 Stock Price At Maturity Payoff and Profit
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
Suppose that both a call option and a put option have been written on a stock with an exerciseprice of $40. The current stock price is $42, and the call and put premiums are $3 and $0.75,respectively. Draw fully labelled profit diagrams of a long call and a short put.
Give typing answer with explanation and conclusion Assume that the risk-free rate is 2.5% and the market risk premium is 5%. What is the required rate of return on a stock with a beta of 1.9? Round your answer to one decimal place.
Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Draw a profit diagram of your strategy to communicate the range of stock prices that the butterfly spread would lead to a loss. (When you draw a profit diagram, please, do consider option premia.
Assume that the risk-free rate is 2.5% and the market risk premium is 8%. What is the required return for the overall stock market? Round your answer to one decimal place. ? % What is the required rate of return on a stock with a beta of 0.5? Round your answer to one decimal place. ? % The above is a two part question, therefore the second answer is determined based off the first answer provided. Please, please, please do provide both answers.
Suppose you write the following put option (1 option, not 1 contract containing 100 options). What is the payoff and profit at expiration if the stock price is $75? Put Strike Symbol 80 ABC210621C00040000 Last 3.32 a. payoff is -5.00; profit is 1.68 X b. payoff is -5.00; profit is 3.32 c. payoff is 0; profit is 0 d. payoff is -5.00; profit is -1.68 e. payoff is 0; profit is -3.32 Chg 1.47
A share price is modelled via a two-period binomial model with initial stock price S=40, up/down multiplication factors u = per time period r = 4%. and d = and interest rate Explain Does this model satisfy the no-arbitrage assumption? Write 0 if your answer is 'no' and 1 if your answer is 'yes'. Answer: your argument in your hand-written answer (b) Calculate the risk-neutral probabilities of up and down movements in the share price. State your answer to three valid digits. Answer: P = Pd= (c) to three valid digits. Answer: Determine the no-arbitrage price of a European call option on the share with strike price K = 70 and expiry time T = 2. State your answer Explain your calculation steps in your hand-written answer.
Assume that there are three different put options on a stock available and that all of them have the same expiration date. These three options have the following market prices $6, $3, and $1, and strike prices $40, $35, and $30, respectively. Construct a butterfly spread and show the relevant profits and losses. The use of graph is essential.
Suppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?

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