Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the year. There is a call option on Lett's stock with a strike price of $55 and an expiration date 1 year from now. What are the stock's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)
Lett Incorporated's stock price is now $50, but it is expected either to rise by a factor of 1.5 or fall by a factor of 0.7 by the end of the year. There is a call option on Lett's stock with a strike price of $55 and an expiration date 1 year from now. What are the stock's possible prices at the end of the year? ($75 or $35) What is the call option's payoff if the stock price goes up? ($20) If the stock price goes down? ($0) If we sell 1 call option, how many shares of Lett's stock must we buy to create a riskless hedged portfolio consisting of the option position and the stock? (0.5) What is the payoff of this portfolio? ($17.50) If the annual risk-free rate is 6%, then how much is the riskless portfolio worth today (assuming daily compounding)? ($16.48) What is the current value of the call option? ($8.52)
PFIN (with PFIN Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
6th Edition
ISBN:9781337117005
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Chapter11: Investment Planning
Section: Chapter Questions
Problem 4FPE
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