Question

2.1 A stock price has an expected return of 15% and a volatility
of 25%. It is currently $56.

2.1.1 What is the probability that it will be greater than $85 in
two years? (4)

2

2.1.2 What is the stock price that has a 5% probability of being
exceeded in two years? (2)

2.2 A binary option pays off $150 if a stock price is greater than
$40 in three months. The

current stock price is $35 and its volatility is 35%. The risk-free
rate is 4% and the expected

return on the stock is 10%.

2.2.1 What is the value of the option? (6)

2.2.2 What is the real-world probability that the payoff will be
received? (4)

2.3 An investor owns 12,000 shares of a particular stock. The
current market price is R100.

What is the “worst case” value of the portfolio in six months? For
the purposes of this

question, define the worst case value of the portfolio as the value
which is such that there

is only a 1% chance of the actual value being lower. Assume that
the expected return and

volatility of the stock price are 8.5% and 23%, respectively.
(4)

2.4 You are a risk manager at World Finance Ltd, the CEO has asked
you to provide a brief

report to him on the definition of traffic light options and what
their drawbacks will be for

the organisation. Correctly reference two academic articles that
deals with traffic light

options for the CEO report.

Answer #1

Question 2
A stock price has an expected return of 15% and a volatility of
25%. It is currently $56.
2.1 What is the probability that it will be greater than $85 in two
years?
2.2 What is the stock price that has a 5% probability
of being exceeded in two years?

A spot price of an asset has an expected return of 16% and a
volatility of 35%. The current price is $38.
What is the probability that a European call option on the
asset with an exercise price of $40 and a maturity date in six
months will be exercised?
What is the probability that a European put option on the asset
with the same exercise price and maturity will be exercised?

3. A stock price follows geometric Brownian motion with an
expected return of 16% and a volatility of 35%. The current price
is $38. a) What is the probability that a European call option on
the stock with an exercise price of $40 and a maturity date in six
months will be exercised? b) What is the probability that a
European put option on the stock with the same exercise price and
maturity will be exercised?

Suppose a stock has an expected return of 10% per year and a
return volatility of 28% per year and equally likely transitions
(i.e. with probability 1/2). The risk-free rate is 4% per year. The
stock has a current price of $100 and has declared dividends of
$2.04 to be paid at the end of each six-month period.
Construct a binomial model for the stock price of ABC with 2
semi-annual periods.
Find the value of a European call option...

2.1 The annual salaries of
employees in a large company are approximately normally
distributed with a mean of R50 000 and a standard deviation of R 20
000.
Calculate the percentage of employees who earn:
2.1.1 less than R40
000?
2.1.2 between R45 000 and R65
000?
2.1.3 more than R70,000?
2.2 The long-distance calls
made by the employees of a company are normally distributed with a
mean of 6.3 minutes and a...

What are the expected return and the standard deviation for the
CoR Stock?
CoR
Stock
Scenario
Probability of Scenario
Rate of Return
Worst Case
0.10
−11%
Poor Case
0.20
−4%
Most Likely
0.40
−2%
Good Case
0.20
8%
Best Case
0.10
14%
Your client decides to invest $1.4 million in Flama stock and
$0.6 million in Blanca stock. The risk-free rate is 4% and the
market risk premium is 5%. The beta of the Flama Stock is 1.2; and...

What are the expected return and the standard deviation for the
CoR Stock?
CoR
Stock
Scenario
Probability of Scenario
Rate of Return
Worst Case
0.10
−11%
Poor Case
0.20
−4%
Most Likely
0.40
−2%
Good Case
0.20
8%
Best Case
0.10
14%
Your client decides to invest $1.4 million in Flama stock and
$0.6 million in Blanca stock. The risk-free rate is 4% and the
market risk premium is 5%. The beta of the Flama Stock is 1.2; and...

1:Consider a European call option on a stock with current price
$100 and volatility 25%. The stock pays a $1 dividend in 1 month.
Assume that the strike price is $100 and the time to expiration is
3 months. The risk free rate is 5%. Calculate the price of the the
call option.
2: Consider a European call option with strike price 100, time
to expiration of 3 months. Assume the risk free rate is 5%
compounded continuously. If the...

A stock fund has an expected return of 15% and a standard
deviation of 25% and a bond fund has an expected return of 10% and
a standard deviation of 10%. The correlation between the two funds
is 0.25. The risk free rate is 5%. What is the (a) expected return
and (b) standard deviation of the portfolio with 70% weight in the
stock portfolio and 30% weight in the bond portfolio?

Consider stock S, which is traded at the price of $45, and has a
return volatility of 43% pa. The riskfree rate of interest is 3%
pa. What is the price of 3-month call option with exercise price of
$48?
Write the answer in number, round it to 2 decimal places.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 17 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago