Question: Consider the March 2010 $5 put option on JetBlue, maturing on March 19, 2010, listed in Table Assume that the volatility of JetBlue is 63.3%

Consider the March 2010 $5 put option on JetBlue, maturing on March 19, 2010, listed in Table

Consider the March 2010 $5 put option on JetBlue, maturing on March

Assume that the volatility of JetBlue is 63.3% per year and its beta is 0.88. The short-term risk-free rate of interest is 2.62% per year. a. What is the beta of the put option? b. What is the put option's leverage ratio? c. If the expected risk premium of the market is 6%, what is the expected return of the put option based on the CAPM? d. Given its expected return, why would an investor buy a put option? Use a 365-day year.

TABLE 21.1 JetBlue Option Quotes JBLU 5.03 +0.11 Jul 24 2009 @ 17:17 ET Bid 5.03 Ask 5.04 Size 168 x 96 Vol 7335887 Open Open Calls Bid Ask Vol Puts Bid Ask Vol Int Int 09 Dec 5.00 (JGQ LA) 47 5865 09 Dec 5.00 (JGQ XA) 0.80 0.90 0.80 0.90 1000 09 Dec 6.00 (JGQ LF) 10 Jan 5.00 (JGQ AA) 09 Dec 6.00 (JGQ XF) 0.45 0.55 2 259 1.40 1.50 0 84 10 Jan 5,00 (JGQ MA 0.85 1.00 125 6433 0.85 0.95 10 14737 10 Jan 6.00 (JGQ AF) 28 10 Jan 6.00 (JGQ MF) 0.50 0.60 C 1.45 1.55 22 10 Jan 9.00 (JGQ AI) 818 10 Jan 9.00 (JGQ MI) 4.00 0 0.05 0.15 4.10 0 10 Mar 5.00 (JGQ CA) 1.05 1.15 50 10 Mar 5.00 (JGQ OA) 1.00 1.10 40 0 10 Mar 6.00 (JGQ CF) 0.65 0.75 146 10 Mar 6.00 (JGQ OF) 1.70 41 0 1.60 10 10 Mar 700 JGQ CG) 0.40 10 Mar 700 (JGQ OG) 2.30 0.50 3 2.45 10 Source: Chicago Board Options Exchange at www.cboe.com TABLE 21.1 JetBlue Option Quotes JBLU 5.03 +0.11 Jul 24 2009 @ 17:17 ET Bid 5.03 Ask 5.04 Size 168 x 96 Vol 7335887 Open Open Calls Bid Ask Vol Puts Bid Ask Vol Int Int 09 Dec 5.00 (JGQ LA) 47 5865 09 Dec 5.00 (JGQ XA) 0.80 0.90 0.80 0.90 1000 09 Dec 6.00 (JGQ LF) 10 Jan 5.00 (JGQ AA) 09 Dec 6.00 (JGQ XF) 0.45 0.55 2 259 1.40 1.50 0 84 10 Jan 5,00 (JGQ MA 0.85 1.00 125 6433 0.85 0.95 10 14737 10 Jan 6.00 (JGQ AF) 28 10 Jan 6.00 (JGQ MF) 0.50 0.60 C 1.45 1.55 22 10 Jan 9.00 (JGQ AI) 818 10 Jan 9.00 (JGQ MI) 4.00 0 0.05 0.15 4.10 0 10 Mar 5.00 (JGQ CA) 1.05 1.15 50 10 Mar 5.00 (JGQ OA) 1.00 1.10 40 0 10 Mar 6.00 (JGQ CF) 0.65 0.75 146 10 Mar 6.00 (JGQ OF) 1.70 41 0 1.60 10 10 Mar 700 JGQ CG) 0.40 10 Mar 700 (JGQ OG) 2.30 0.50 3 2.45 10 Source: Chicago Board Options Exchange at www.cboe.com

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