Question

A company is currently the possible target of a hostile takeover which is expected to become...

A company is currently the possible target of a hostile takeover which is expected to become public within two months. The stock price is currently $36. If the hostile takeover happens, the stock price is expected to be $48 at the end of two months. If the hostile takeover does not happen, it is expected to be $28 at the end of this two month time period. The two-month risk-free interest rate is 6% per annum. What is the risk-neutral probability of a positive outcome?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Su = Expected Upward Price after 2 months / Current Price = $48/36 = 1.3333

Sd = Expected Downward Price after 2 months / Current Price = $28/36 = 0.7778

What is the risk-neutral probability of a positive outcome?

risk-neutral probability of a positive outcome = (1 + 2 month Interest Rate - Sd) / (Su - Sd)

risk-neutral probability of a positive outcome = (1 + 0.005 - 0.7778) / (1.3333 - 0.7778)

risk-neutral probability of a positive outcome = 0.2272 / 0.5556

risk-neutral probability of a positive outcome = 40.90%

Please dont forget to thumbs up

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A stock price is currently $40. It is known that at the end of three months...
A stock price is currently $40. It is known that at the end of three months it will be either $45 or $35. The risk-free rate of interest with quarterly compounding is 8% per annum. Calculate the value of a three-month European put option on the stock with an exercise price of $40. Verify that no-arbitrage arguments and risk-neutral valuation arguments give the same answers
A non-dividend-paying stock of Shopify is currently selling for $40. It is expected that over the...
A non-dividend-paying stock of Shopify is currently selling for $40. It is expected that over the next 6 months it is expected to rise to $44 or fall to $36. An investor buys a 6-month put option with an exercise price of $28. The risk-free interest rate is 1%. What is the value of each option?
►A stock price is currently $50. It is known that at the end of six months...
►A stock price is currently $50. It is known that at the end of six months it will be either $46 or $54. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a six-month European put option with a strike price of $48? What is the value of a six-month American put option with a strike price of $48?
A stock is expected to pay a dividend of $0.50 per share in two month, in...
A stock is expected to pay a dividend of $0.50 per share in two month, in five months and in eight months. The stock price is $20, and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. You have just taken a short position in a nine-month forward contract on the stock. Seven months later, the price of the stock has become $23 and the risk-free rate of interest is still 5% per annum....
A ten-month European put option on a dividend-paying stock is currently selling for $4. The stock...
A ten-month European put option on a dividend-paying stock is currently selling for $4. The stock price is $40, the strike price is $43, and the risk-free interest rate is 6% per annum. The stock is expected to pay a dividend of $2 two months later and another dividend of $2 eight months later. Explain the arbitrage opportunities available to the arbitrageur by demonstrating what would happen under different scenarios.
A stock price is currently $50. It is known that at the end of 3 months...
A stock price is currently $50. It is known that at the end of 3 months it will be either $50 or $48. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 3-month European put option with a strike price of $49? How about a 6-month European call price? (Hint: 2 period binomial option pricing)
A stock is expected to pay a dividend of $1 per share in two months and...
A stock is expected to pay a dividend of $1 per share in two months and in five months. The stock price is $50, and the risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a short position in a six-month forward contract on the stock. What are the forward price and the initial value of the forward contract? Three months later, the price of the stock is $48 and...
A stock is expected to pay a dividend of $0.70 per share in one month, in...
A stock is expected to pay a dividend of $0.70 per share in one month, in four months and in seven months. The stock price is $30, and the risk-free rate of interest is 7% per annum with continuous compounding for all maturities. You have just taken a short position in an eight-month forward contract on the stock. Six months later, the price of the stock has become $34 and the risk-free rate of interest is still 7% per annum....
A stock is expected to pay a dividend of $0.70 per share in one month, in...
A stock is expected to pay a dividend of $0.70 per share in one month, in four months and in seven months. The stock price is $30, and the risk-free rate of interest is 7% per annum with continuous compounding for all maturities. You have just taken a short position in an eight-month forward contract on the stock. Six months later, the price of the stock has become $34 and the risk-free rate of interest is still 7% per annum....
A stock is expected to pay a dividend of $0.60 per share in one month, in...
A stock is expected to pay a dividend of $0.60 per share in one month, in four months and in seven months. The stock price is $25, and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. You have just taken a long position in an eight-month forward contract on the stock. Six months later, the price of the stock has become $29 and the risk-free rate of interest is still 6% per annum....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT