A share price is currently $180. At the end of one year, it will be either $203
Question:
A share price is currently $180. At the end of one year, it will be either $203 or $152. The risk-free interest rate is 3% p.a. with continuous compounding. Consider an American put on this underlying. Find the exercise price for which holding the option for the year is equivalent to exercising immediately. This is the break-even exercise price. What effect would a decrease in the interest rate have on this break-even price?
Step by Step Answer:
The breakeven exercise price can be calculated by setting the present value of exerci...View the full answer
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Business questions
-
A share price is currently $75. At the end of three months, it will be either $59 or $92. What is the risk-neutral probability that the share price increases? The risk-free interest rate is 4% p.a....
-
A share price is currently $15. At the end of three months, it will be either $13 or $17. Ignoring interest rates, calculate the value of a three-month European option with payoff max(S 2 159, 0),...
-
One Product Corp. (OPC) incorporated at the beginning of last year. The balances on its post-closing trial balance prepared on December 31, at the end of its first year of operations, were: The...
-
3. Show how accounts receivable will appear on the December 31, 2023, balance sheet. Assets Current assets: Partial Balance Sheet Accounts receivable Less: Allowance for doubtful accounts 22,525
-
Find the derivatives of the following functions using the quotient rule. f (x) = 1 +2x
-
A conducting bar of length l and mass m rests at the left end of the two frictionless rails of length d in FIGURE P29.75. A uniform magnetic field of strength B points upward. a. In which direction,...
-
Below are the comparative statements of financial position of Lunar Ltd. Required Prepare a statement of cash flows for the year ended 30 June 2025 in accordance with the direct method. Include any...
-
Assume that Dover Hospital performs the following activities in providing outpatient service: a. Verifying patients insurance coverage b. Scheduling patients arrival date and time c. Scheduling staff...
-
Direction. Answer the question below. 1. Write the program code of the given flowchart. 2. Write the output of the program code. Activity 3. Writing program code Start Counter = 2 Counter
-
A multiple regression model was used to relate y = viscosity of a chemical product to x1 = temperature and x2 = reaction time. The data set consisted of n = 15 observations. (a) The estimated...
-
A share price is currently $63. At the end of each three month period, it will change by going up $3 or going down $3. Calculate the value of a six month American put option with exercise price $61....
-
A share has an expected return of 12% per annum (with continuous compounding) and a volatility of 20% per annum. Changes in the share price satisfy dS = S dt + S dX. Simulate the movement of the...
-
What would happen if the try statement were removed from the level1 method of the ExceptionScope class in the Propagation program?
-
3. Send an email to all Blue Healer Staff. The text of the email should be in grammatically correct English, written in an appropriate (polite, business-like) style. It should introduce and summarise...
-
Brief summary of the article Early Christian and Byzantine art Briefly (in about three sentences) tell us what the significance of your article's subject Discusses (in about three or four sentences)...
-
Consider a social community to which you belong. What ideas, values, beliefs, and customs of your social community differ from those of the dominant culture? Or is it aligned with the dominant...
-
Write brief answers to the following questions. 50. Provide a rationale for why each step of the nursing process is important. Although it may seem that the importance of the steps is obvious, write...
-
Imagine that you have worked to increase the effectiveness of your organization through the company's use of individuals and teams. Now you and your colleagues have the opportunity to present your...
-
Zhu Boards sells a snowboard, Xpert that is popular with snowboard enthusiasts. Information relating to Zhu's purchases of Xpert snowboards during September is shown on the next page. During the same...
-
Use this circle graph to answer following Exercises. 1. What fraction of areas maintained by the National Park Service are designated as National Recreation Areas? 2. What fraction of areas...
-
You have created a Monte Carlo simulation to calculate the one-day, 99% VaR of a portfolio containing a large number of options. In your simulation, you generate 1,000 sample one-day returns. The...
-
Which of the following distributions are associated with EVT: a) Poisson b) Weibull c) Frchet d) Clayton e) Gumbel
-
You are asked to evaluate the risk of a portfolio containing two securities. The first security has an expected shortfall of $400 (a loss of $400).The second security has an expected shortfall of...
-
Pretend you need to conduct a title search. You have the information needed from your online search, but you need to go to the clerk's office to finish your search. What information/records will/can...
-
Watch the Tedx Talk (Melvin Russell: I love being a police officer, but we need reform) by Lt. Colonel Melvin Russel from the Baltimore Police. In his talk, he discusses how law enforcement is in...
-
Solve for X. Assume X is a 2 x 2 matrix. Do not use decimal numbers in your answer. If there are fractions, leave them unevaluated. X = # 6 X+ 7 = 7 8 X. [24]*+41-41 -5
Study smarter with the SolutionInn App