Question

Fly by Night stock price is expected to go up by 20% or down by 15%...

Fly by Night stock price is expected to go up by 20% or down by 15% over the next year. You own a one-year put option on the stock. The interest rate is 12%, and current stock price of Fly by Night is $75. What exercise price leaves you indifferent between holding the put and exercise it now?

A.

$27.342

B.

$121.332

C.

$14.452

D.

$62.349

E.

$77.907

F.

$34.521

G.

$88.437

H.

$49.508

Homework Answers

Answer #1

Expected return = (Probability of rise * change in price) + (1 - probability of risk)

0.12 = ( P * 0.20) + (1 - P) * (-0.15)

0.12 = 0.20P + 0.15P - 0.15

0.12 + 0.15 = 0.35P

0.27 = 0.35P

P = 0.27 / 0.35

P = 0.7714


Probable next year stock prices:

$75 * 1.20 = $90
$75 * (1 - 0.15) = $63.75


X - 75 = ((P * $0) + (1 - P) * (X - 63.75)) / (1+r)

X - 75 = ((0.7714 * $0) + (1 - 0.7714) * (X - 63.75)) / 1.12

(X - 75) * 1.12= (0 + 0.22857X - 14.5714)

1.12X - 0.22857X = 84 - 14.5714

0.89143X= 69.4286

X = 69.4286 / 0.89143

X = $77.907

Break even excise price = $77.907

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Kumon Co. stock price is expected to go up by 20% or down by 15% over...
Kumon Co. stock price is expected to go up by 20% or down by 15% over the next year. You own a one-year put option on the stock. The interest rate is 12%, and current stock price of Kumon is $75. What exercise price leaves you indifferent between holding the put and exercise it now? A. $77.907 B. $27.342 C. $88.437 D. $121.332 E. $62.349 F. $14.452 G. $49.508 H. $34.521
When the exercise price goes up, the price of the call option on the stock will...
When the exercise price goes up, the price of the call option on the stock will ______; and the price of the put option on the stock will ________. A) go up; go down B) go up; go up C) go down; go down D) go down; go up
When the exercise price goes up, the price of the call option on the stock will...
When the exercise price goes up, the price of the call option on the stock will ______; and the price of the put option on the stock will ________. (go up/ go down)
The current price of a stock is $35. It can either go up to $65 with...
The current price of a stock is $35. It can either go up to $65 with probability 0.5 or it can go down to $25 with probability 0.5. The risk free rate of interest is 6%. 1. What is the value of a call on the stock with an exercise price of $35 which expires in 1 year's time? 2. What is the value of a put with an exercise price of $30?
When the stock price goes up, the price of the call option on the stock will...
When the stock price goes up, the price of the call option on the stock will ______; and the price of the put option on the stock will ________. (go up/ go down)
The current stock price of firm AAa= $20. It is expected that this firm’s stock price...
The current stock price of firm AAa= $20. It is expected that this firm’s stock price will go up by 20%, or it might go down by 20%. No dividends. The one year risk free rate = 5%. A call option’s strike price is also $20. Using the binomial pricing model , calculate that to set up a risk free portfolio, for each call option, how many stocks (or portion of a stock) is needed. 22. Using the binomial pricing...
A stock price is currently S = 100. Over the next year, it is expected to...
A stock price is currently S = 100. Over the next year, it is expected to go up by 100% (u = 2) or down by 50% (d = 0.50). The risk-free interest rate is r = 20% per annum with continuous compounding. What is the value of a 12-month European Put option with a strike price K = 100?
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...
Consider a world in which some stock, S, can either go up by 25% or down...
Consider a world in which some stock, S, can either go up by 25% or down by 20% in one year and no other outcomes are possible. The continuously compounded risk-free interest, r, is 5.5% and the current price of the stock, S0, is $100. (a) What are the possible stock values in one year’s time, ST? (b) What are the possible payoffs of a European call option written on stock S with a strike price, X, of $100 and...
A stock price is currently $100. Over each of the next two six-month periods, it is...
A stock price is currently $100. Over each of the next two six-month periods, it is expected to go up by 10% or down by 10%. The risk-free interest rate is 10% per year with semi-annual compounding. Part I. Use the two-steps binomial tree model to calculate the value of a one-year American put option with an exercise price of $101. Part II. Is there any early exercise premium contained in price of the above American put option? If there...