The current price of a non-dividend paying stock is $119. Overthe next year, it is expected to go up or down by 13% or 11%,respectively. The risk-free rate is 5% per year with continuouscompounding. A market-maker of an important investment bankjust sold 100 at-the-money European call options (i.e. onecontract) expiring in one year to an important client. How manyshares of the stock does she need to buy in order to hedge herexposure? Express your answer with two decimals.

To find the number of shares to hedge the exposure, we first need to find the hedge ratio of delta…

Answered: The current price of a non-dividend…

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

The spot price of a non-dividend paying stock is recorded as ₺80 at the close of the day. You estimatethat this price is equally likely to go up by 11.1% or go down by 10% every two months and observe thatthe continuously compounded annual risk-free rate is 20% per year across all maturities. Use a three-stepbinomial tree and the risk-neutral valuation approach to compute the theoretical value of a European putoption written on this stock that has a strike price of ₺75 and exactly six months until its expiration date.
Consider a stock currently priced at $60. Assume that in each period of one month, the stock could either appreciate or depreciate by 10%. The risk free rate is 2% per period. What would be the value of a 3-month 60 European call if a dividend of $1 would be paid and the ex - dividend date is at the end of the second period? Justify your answer.
Suppose Facebook Inc. currently pays $1 dividend. Analysts project that the dividend for the next three years will be $1, $2, and 5$. After that the annual dividend is predicted to grow at 5% per year. Investors require a 10% rate of return. What is the value of one share of Facebook stock under these assumptions?
1. Metrobank’s stock is currently trading at P25 per share. The stock’s dividend is projected to increase at a constant rate of 7 percent per year. The required rate of return on the stock is 10 percent. What is the expected stock price five years from today? a. P32.77 b. P35.06 c. P36.60 d. P28.14 2. World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with an annual dividend of P5 per share. The stock will have a par value of P30. If investors’ required rate of return on this investment is currently 20%, what should the preferred stock’s market value be? a. P20 b. P10 c. P25 d. P15 3. Assume that you wish to purchase a 30-year bond that has a maturity value of P1,000 and a coupon interest rate of 9.5%, paid semiannually. If you require a 6.75% rate of return on this investment, what is the maximum price that you should be willing to pay for this…
Consider a European call on a stock when there are ex-dividend dates in 5. four months and seven months. The dividend on each ex-dividend date is expected to be $2.50. The current stock price is $50, the exercise price is $51, the volatility is 20% per annum, the continuously compounded risk- free interest rate is 12% per annum, and the time to expiration is nine months. Calculate the price of the call.
Suppose BIG BANG Inc just paid a dividend of 1.50 pesos. It is expected to increase its dividend by 5% per year. If the market requires a return 20% on assets of this risk. How much should the stocks be selling in year 4?
Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.66.Required: a. Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the intrinsic value of the stock?
You are considering an investment in Crisp Cookware’s common stock. The stock is expected to pay a dividend of $2 a share at the end of this year (D1 = $2.00); its beta is 0.9; the risk-free rate is 5.6%, and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $25 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is P3)?
Clinton Corporation is expected to pay a dividend of $3.50 next year and $5.50 the year after that. At this point (end of year 2 beginning of year 3) the growth rate in dividends is expected to be 0.05 into the foreseeable future. The required return on stock's of similar risk is 12%. What is the current price Po? Answer should be to nearest penny: ex: 20.32 Be sure to round correctly 20.326 would be 20.33 Your Answer: Answer
The current price of a stock is 25. The stock pays quarterly dividend of 0.02 with the first dividend being paid 2 months from now. The continuously compounded riskfree interest rate is 5% per year. Suppose the investors in this stock demand to be compensated for risk. What is (a) the minimum possible value of the expected stock price 3 years from now, and (b) the corresponding continuously compounded rate of return per year in the 3- year horizon?
The current price of a stock is 25. The stock pays quarterly dividend of 0.02 with the first dividend being paid 2 months from now. The continuously compounded riskfree interest rate is 5% per year. Suppose the investors in this stock demand to be compensated for risk. What is (a) the minimum possible value of the expected stock price 3 years from now, and (b) the corresponding continuously compounded rate of return per year in the 3-year horizon?
A Company is expected to pay a dividend of sh2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of the Company shares to be sh22 a year from now. The beta of the Company's stock is 1.25. Required: a. If the Company's intrinsic value is sh21.00 today, what must be its growth rate? Select one: a. 7% b. 4% c. 10% d. 6% e. 0.0% b. The market's required rate of return on the Company’s stock is _ Select one: a. 16.5% b. 17.5% c. 15.25% d. 14.0% e. none of the above c. What is the intrinsic value of the Company's stock today? Select one: a. sh12.12 b. sh20.00 c. sh22.00 d. none of the above e. sh20.60

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