Look again at the Amazon call option that we valued in Section 23.2. Suppose that by July

Question:

Look again at the Amazon call option that we valued in Section 23.2. Suppose that by July 2018, the price of Amazon stock could double to $2,600 or halve to $650. Everything else is unchanged from our example.

a. What would be the value of three Amazon call options with exercise price $1,300 in July 2018 for each of the two possible stock prices?

b. Consider a portfolio of 2 shares of Amazon financed in part by issuing a zero coupon bond with face value of $1,300. What would be the payoff in July to that portfolio for each of the two possible stock prices?

c. Confirm that the portfolios in parts (a) and (b) have the same payoff for either stock price.

d. How much would the portfolio in part (b) cost to establish? Continue to assume an interest rate of 1% for the six-month period.

e. What must be the value of the call option?

f. We have now assumed greater stock volatility than in our example in Section 23.2. Has this increased or decreased the value of the option?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...

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