I. II. III. Find the value (using Binomial Tree) of a European style call option on...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
I. II. III. Find the value (using Binomial Tree) of a European style call option on an underlying stock which is currently selling at RM10 with the following assumptions: • The call option on the stock has a RM10 exercise price and one year maturity; • Change in price three times during the one year; • The percentage change in the stock's price is 10%, that is, it can either go up or down by a fixed 10%; • The probability of an up is 60% and down movement is an equal 40%; and • Interest rate is 8% per annum (15 marks) Suppose you have the following information concerning a particular options. Stock price, S Exercise price, K Interest rate, r Maturity, T = 180 days Standard deviation, a = RM 21 = RM 20 = 0.08 = 0.5 = 0.5 a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model. (5 marks) (5 marks) Suppose a European put options has a price higher than that dictated by the put- call parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices you have computed in the previous question (II) above. (10 marks) (5 marks) b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on? (5 marks) IV. You think MBB stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take opportunity of any up movement in price but want to strictly limit your downside risk. MBB stock price now is RM 12.00. a. Given the information below, outline TWO possible appropriate strategies. For each strategy, • • State the position Graph the strategy Outline the risk profile, and State the maximum profit, maximum loss, and break-even point(s). 30-day calls 11 call @ 1.55 12 call @ 0.70 12 call @ 0.22 30-day puts 11 put @ 0.25 12 put @ 0.45 13 put @ 1.40 (20 marks) (5 marks) b. From a cost viewpoint, which is the best strategy? c. What are the recommended options strategies when you expect the market has extreme (high) volatility? (5 marks) V. Suppose you had just gone long (purchased) on lot of Syarikat XYZ stock at a price of RM 15.00 each, for a total investment of RM 15,000. You believe this stock has long term potential but wish to protect yourself from any short-term downside movement in price. Suppose 3-month, at-the-money put options on Syarikat XYZ stocks are being quoted at RM 0.15 or 15 sen each or RM 150 per lot (RM 0.15 x 1,000). a. What would be the appropriate options strategy to hedge the long stock position? (5 marks) b. Show (in a table) the payoff to the combined position for a given range of stocks prices at options maturity in 3-months. (10 marks) c. Draw the payoff profile of combined positions. (10 marks) I. II. III. Find the value (using Binomial Tree) of a European style call option on an underlying stock which is currently selling at RM10 with the following assumptions: • The call option on the stock has a RM10 exercise price and one year maturity; • Change in price three times during the one year; • The percentage change in the stock's price is 10%, that is, it can either go up or down by a fixed 10%; • The probability of an up is 60% and down movement is an equal 40%; and • Interest rate is 8% per annum (15 marks) Suppose you have the following information concerning a particular options. Stock price, S Exercise price, K Interest rate, r Maturity, T = 180 days Standard deviation, a = RM 21 = RM 20 = 0.08 = 0.5 = 0.5 a. What is correct of the call options using Black-Scholes model? b. Compute the put options price using Black-Scholes model. (5 marks) (5 marks) Suppose a European put options has a price higher than that dictated by the put- call parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices you have computed in the previous question (II) above. (10 marks) (5 marks) b. Name the options/stock strategy used to proof the put-call parity. c. What would be the extent of your profit in (a) depend on? (5 marks) IV. You think MBB stock has potential for an upward move in price. You have no position whatsoever in the stock now. You would like to take opportunity of any up movement in price but want to strictly limit your downside risk. MBB stock price now is RM 12.00. a. Given the information below, outline TWO possible appropriate strategies. For each strategy, • • State the position Graph the strategy Outline the risk profile, and State the maximum profit, maximum loss, and break-even point(s). 30-day calls 11 call @ 1.55 12 call @ 0.70 12 call @ 0.22 30-day puts 11 put @ 0.25 12 put @ 0.45 13 put @ 1.40 (20 marks) (5 marks) b. From a cost viewpoint, which is the best strategy? c. What are the recommended options strategies when you expect the market has extreme (high) volatility? (5 marks) V. Suppose you had just gone long (purchased) on lot of Syarikat XYZ stock at a price of RM 15.00 each, for a total investment of RM 15,000. You believe this stock has long term potential but wish to protect yourself from any short-term downside movement in price. Suppose 3-month, at-the-money put options on Syarikat XYZ stocks are being quoted at RM 0.15 or 15 sen each or RM 150 per lot (RM 0.15 x 1,000). a. What would be the appropriate options strategy to hedge the long stock position? (5 marks) b. Show (in a table) the payoff to the combined position for a given range of stocks prices at options maturity in 3-months. (10 marks) c. Draw the payoff profile of combined positions. (10 marks)
Expert Answer:
Answer rating: 100% (QA)
Here are the answers to the questions I Find the value of a European call option using binomial tree method Stock price now RM10 Exercise price RM10 M... View the full answer
Related Book For
Intermediate Accounting principles and analysis
ISBN: 978-0471737933
2nd Edition
Authors: Terry d. Warfield, jerry j. weygandt, Donald e. kieso
Posted Date:
Students also viewed these general management questions
-
Suppose you have the following information concerning a particular options. Stock price, S = RM 21 Exercise price, K = RM 20 Interest rate, r = 0.08 Maturity, T = 180 days = 0.5 Standard deviation, =...
-
The common stock of Alexander Hamilton Inc. is currently selling at $120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par...
-
The stock of Pills Berry Company is currently selling at $60 per share. The firm pays a dividend of $1.80 per share. a. What is the annual dividend yield? b. If the firm has a payout rate of 50...
-
Limits from graph In this problem we evaluate limits from the graph. Consider the graph of f given in [Figure 1]. Evaluate each of the following limits (or explain why if the limit does not exist)....
-
There are four people being considered for the position of chief executive officer of Dalton Enterprises. Three of the applicants are over 60 years of age. Two are female, of which only one is over...
-
Barry's Steroids Company has $1,000 par value bonds outstanding at 13 percent interest. The bonds will mature in 40 years. If the percent yield to maturity is 11 percent, what percent of the total...
-
Describe the processes that each traditional functional business unit performs.
-
Edison Company manufactures wool blankets and accounts for product costs using process costing. The following information is available regarding its May inventories. The following additional...
-
Required Compute variances for the following items and indicate whether each variance is favorable (F) or unfavorable (U): Note: Select "None" if there is no effect (i.e., zero variance). Item Sales...
-
Create a Budget Analysis Report for the month of September, to include creating a Master Budget, and calculating the variance analyses between Actuals versus the Flexible Budget and versus the Master...
-
Suppose a trader is interested in longing in the futures market. In Day 0, the date the trader enters the market, the futures price was $100. What could be the maximum amount of loss the trader per...
-
Explain the FAIR approach to ethical business communications.
-
Create specific and persuasive proposals.
-
Explain the principles of effective virtual team communication.
-
Describe and demonstrate approaches to planning, running, and following up on meetings.
-
Identify common communication preferences based on motivational values.
-
What is the main goal of political parties? To organize political rallies To organize interest groups To fund the campaigns of political candidates To gain control of government through the election...
-
What are the three kinds of research types? Explain each type.
-
Included in the December 31 trial balance of Billie Joel Company are the following assets. Cash ........ $ 190,000 Work in process ... $200,000 Equipment (net) ... 1,100,000 Receivables (net) .......
-
Dividends are sometimes said to have been paid out of retained earnings. What is the error, if any, in that statement?
-
Doom Troopers Corporation purchases a patent from Judge Dredd Company on January 1, 2008, for $64,000. The patent has a remaining legal life of 16 years. Doom Troopers feels the patent will be useful...
-
S1 Ltd and S2 Ltd belong to the same capital gains group. In May 2020, S1 Ltd transferred a chargeable asset to S2 Ltd. The original cost of this asset to S1 Ltd was 10,000 and its market value in...
-
The ordinary share capital of W Ltd (which is a trading company) is owned 30% by X Ltd, 25% by Y Ltd and 45% by Z Ltd. All of these companies are UK resident and they prepare accounts to 31 March....
-
E Ltd has taxable total profits of 800,000 for the year to 31 March 2024 and receives no dividends. For many years, the company has owned 65% of the ordinary shares of F Ltd and 30% of the ordinary...
Study smarter with the SolutionInn App