Question
Set-up for all parts: Suppose that the current price of an asset is $80. After six...
Set-up for all parts: Suppose that the current price of an asset is $80. After six months, there are two possible scenarios: S+ =$100 and S- = $50. The exercise price of the call option is $90 and its expiration date is six months from now. The annual risk-free rate is 2%.
C) Using the present cash flow of the arbitrage strategy, compute the size of the call premium?
Homework Answers
Answer #1
ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
call premium= $6.10
Not the answer you're looking for?
Similar Questions
Suppose that the current price of an asset is $80. After six months, there are two...
Suppose that the
current price of an asset is $80. After six months, there are two
possible scenarios: S+ =$100 and S- = $50.
The exercise price of the call option is $90 and its expiration
date is six months from now. The annual risk-free rate is 2%.
What is the hedge
ratio?
A call option with an exercise price of $110 has six months to the expiration date....
A call option with an exercise price of $110 has six months to
the expiration date.
Currently, the stock is sold at a price of $120. At the expiration
date, the underlying stock has
two possible ending prices: $150 or $105. The risk-free rate of
return is 8 percent per annum.
Calculate the price of this call option using binomial option
pricing model.
Current stock price of underlying asset = $80 Standard deviation of returns of underlying asset =...
Current stock price of underlying asset = $80
Standard deviation of returns of underlying asset = 30%
Strike price of call option = $85
Time to expiry of call option = 6 months
Price of call option = $5.53
Risk-free rate = 5%
The price of a corresponding put option is closest
to
Group of answer choices
A) $3.3
B) $6.1
C) $8.4
D) $9.9
Current stock price of underlying asset = $80
Standard deviation of returns of underlying asset...
A six-month European call option's underlying stock price is $86, while the strike price is $80...
A six-month European call option's underlying stock price is
$86, while the strike price is $80 and a dividend of $5 is expected
in two months. Assume that the risk-free interest rate is 5% per
annum with continuous compounding for all maturities.
1) What should be the lowest bound price for a six-month
European call option on a dividend-paying stock for no
arbitrage?
2) If the call option is currently selling for $2, what
arbitrage strategy should be implemented?
1)...
Assuming current stock price of ABC Company is $100. Over each of the next two six-month...
Assuming current stock price of ABC Company is $100. Over each
of the next two six-month periods, the price is expected to go up
by 10% or down by 10% during each six-month period. The risk-free
interest rate is 8% per annum with annual compounding.
Required:
a. Calculate the option premium for a one-year European call
option with an exercise price of $80. Show your calculation steps.
b. Using the option premium calculated in Part a of Question 9,
estimate...
A European call option has a strike price of $20 and an expiration date in six...
A European call option has a strike price of $20 and an
expiration date in six months. The premium for the call option is
$5. The current stock price is $25. The risk-free rate is 2% per
annum with continuous compounding. What is the payoff to the
portfolio, short selling the stock, lending $19.80 and buying a
call option? (Hint: fill in the table below.)
Value of ST
Payoff
ST ≤ 20
ST > 20
How much do you pay...
Explain how each trader would set up a strategy to carry out their intended purpose. Be...
Explain how each trader would set up a strategy to carry out
their intended purpose. Be as specific as possible in each case, by
providing details about the strategy: the position (whether long or
short), the size of the exposure (notional amount), the number of
contracts involved (if more than one), the expiration date of the
contracts, etc. In each case, explain whether the trader will
realize a profit or a loss if the underlying asset/variable
increases by 10%. An...
1. Suppose that firm Ds shares are currently selling for $38. After six months it is...
1. Suppose that firm Ds shares are currently selling for $38.
After six months it is estimated that the share price will either
rise to $43.32 or fall to $33.82. If the share price rises to
$43.32 in six months, six months from that date (1 year from today)
the price is estimated to be either $49.38 or $38.55. If the share
price falls to $33.82 in six months, six months from that date (1
year from today) the price...
The strike price for a European call and put option is $56 and the expiration date...
The strike price for a European call and put option is $56 and
the expiration date for the call and the put is in 9 months. Assume
the call sells for $6, while the put sells for $7. The price of the
stock underlying the call and the put is $55 and the risk free rate
is 3% per annum based on continuous compounding. Identify any
arbitrage opportunity and explain what the trader should do to
capitalize on that opportunity....
The price of a non-dividend paying stock is $45 and the price of a six-month European...
The price of a non-dividend paying stock is $45 and the
price of a six-month European call option on the stock with a
strike price of $46 is $1. The risk-free interest rate is 6% per
annum. The price of a six-month European put option is $2. Both put
and call have the same strike price. Is there an arbitrage
opportunity? If yes, what are your actions now and in six months?
What is the net profit in six months?
ADVERTISEMENT
Need Online Homework Help?
Get Answers For Free
Most questions answered within 1 hours.
ADVERTISEMENT
Active Questions
asked 8 minutes ago
asked 18 minutes ago
asked 26 minutes ago
asked 41 minutes ago
asked 52 minutes ago
asked 1 hour ago
asked 1 hour ago
asked 1 hour ago
asked 1 hour ago
asked 2 hours ago
asked 2 hours ago
asked 2 hours ago