EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 21, Problem 10PS
Summary Introduction
(a)
To calculate:
The value of call option on the stock with a strike price of 110.
Summary Introduction
(b)
To show:
put call parity.
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A forward contract has an underlying asset which, in Cox-RossRubenstein notation, has S=22,u=1.2 and d=0.9. This forward contract matures in one time step and the return over this time step is R=1.02. Assuming the forward price is calculated rationally, what is the value of the forward at node (1,1)? (Give your answer as a positive number.)
Consider a call option having the strike price K and exercise time t. Suppose further that thenominal interest rate is r, compounded continuously, and also that the price of the securityfollows a geometric Brownian motion with variance parameter σ^2. Derive the formula that isused to price the unique cost of the option that does not give rise to an arbitrage.
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.
Chapter 21 Solutions
EBK INVESTMENTS
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- Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf] Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate? A) zero B) 0.5 C) 1.0 D) its randomarrow_forwardEconomics Compute (F/A,%13,20) using the closed-form formula and call that X Also approximate it; by applying linear interpolation between the values obtained from "compound interest factors" table for (F/A,%12,20) and (F/A,%15,20) and call that y. What is X- y? Choose the closest value to your answer. A 0 (B) 11.3664 c) -11.3664 D 1.2358 E) -1.2358arrow_forward3. Show that the Black-Scholes formula for a call option gives a price which tends to [ST − K]+ as t → T .arrow_forward
- What impact does each of the followingparameters have on the value of a call option?(4) Risk-free ratearrow_forwardState the decision criteria for each of the following. (2) PI > MIRR > NPV > IRR > options; 0 1 PI MIRR NPV IRR Paybackarrow_forwardWe consider a one-step binomial tree in which the parameters are u = 1.2, d = 0.8, r = 0.12, T = 0.25, fu = 3, fa = 0. Evaluate the followings: (1) Calculate the probability p of an up movement in a risk-neutral world. (2) Compute the current price f.arrow_forward
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