Question

Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.44 per share. In one year, the share price is equally likely to be $29 or $20. The risk-free interest rate is 5%. a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike price of $25? b. What is the expected return of the call option? c. Using the risk-neutral probabilities, what is the value of a one-year put option on Harbin stock with a strike price of $25? d. What is the expected return of the put option?

Answer 1

Snswer ge o Hanbin manulautwina shoies = lo million shane pice p shooie 23, 44 share 20. inteest ate 5 isk- Bree (a) Value ot stke pice $25 Call one option Side upper = ma.? ( २१- २5) Pay off max (o-5) pay in don side hedge Payoin upper sfde.downside Tatio 3-o) (ই१-20) 1 (২१ - 2०) O, 33 Sell one call bj o. 33 shane O 33 x S C Natue tor y t upside - 3+ o, 33 x 29 39.5+

Downsi de O o 33x 20 Pageo2 PYpertolio 6.6C15) G.6C.05) 6. 285 Nalue potolio Cunnent -Co. 33 x 3.44 C 4 .7352 G. 285 -Ct .7352 = 7332 - 6.28 57 (b xpeted etionn the call opHon Expected netun o.5x 30. Xo .5+0 Calt cost =.4495 5-.y5 $1etwin O.0505 o.0348 Expeated netion 3.48 /.

Pageo3 ptce425 (c Va ue eput pton with shike one Side Pay pper Pay down side maz hedge atio (o-5) (2१-20) - o,56 bu one put and buy o. 56 shone P+ o. 56 xS in upside Vaue atten Downside 5 o56 x Qo = 5t.2 6, 2 Pvpotfolto 6. 2 16.2 5.42

ageoy 1ntvalue pertfolo P+o 56 x. Pto.56x3.q4 ptI3.12 Pt13.12= 15,42 P .3 17 d pected eluin the put option €xpected 1etuun = 0.5 x0+ 0.5x5 Cali cot (Q.5-a.3) 1etwin O, 2 o, o86 Erpected netan 8. 69.