Suppose that $1 today and one year from today are equivalent. Suppose that there is an...
Suppose that $1 today and one year from today are equivalent. Suppose that there is an option that costs x. Whoever owns the option has the right to sell y shares of Google stock (to whomever sold the option) at a price of p one year from today. Denote the price of Google stock one year from today by p0.
- 1: What are the earnings of the owner of the option and what are the earnings of the seller of the option as a function of p0?
• 2: Graph the earnings of each as a function of p0.
• 3: Now suppose that there are two possible prices that Google could be one year from today: 90 (with probability 2/3) and 400 (with probability 1/3). What is the value of x at which the option is a fair game?
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Suppose that $1 today and one year from today are equivalent.
Suppose that there is an...
2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's tim...
2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's time the stock is worth 110 with probability 0.75, and 85 with probability 0.25. The one-year annually compounded interest rate is 5%. a) Calculate the forward price of the stock for a forward contract with maturity one year. (b) Calculate the price of a one-year European put option with strike 100. (c) Suppose you observe that the put option in part...
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Walmart stock is currently trading at $57/share. Assume that its value in exactly one year is a random variable with the probability mass function given below. What is the fair premium for a one-year put option on Walmart stock with a strike price of $52? Price $42 $48 $51 $54 $63 Probability 0.1 0.2 0.1 0.2 0.4
12- Today, I bought 1 call contract on GM with one-year to maturity with an exercise...
12- Today, I bought 1 call contract on GM with one-year to maturity with an exercise price of $50 at a premium of $5 when GM stock price was $50. Two month later, GM stock price closed at $62 while the option premium was $15 at which time I closed my position by selling my call option. Compute my gain/loss. PS: In all questions above X denotes the exercise price of the options, C=call premium, P=put premium, and S=stock price.
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1. A share of common stock will pay $1.00 in a year, and at that time, the stock is sold for $50. If the rate of return (Rs) is 10%, then what is the price of the stock? Stock Price Today, P0 = ________ 2. A share of common stock will pay $1.00 in a year, $3.00 in two years, and at that time, the stock is sold for $50. If the rate of return (Rs) is 10%, then what...
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Eagletron's current stock price is $ 10. Suppose that over the current year, the stock price will either increase by 98% or decrease by 60%. Also, the risk-free rate is 25% (EAR). a. What is the value today of a one-year at-the-money European put option on Eagletron stock? b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $19.80? c. Suppose the put options in parts (a) and (b) could...
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A stock S has value S = 2 today and in one year the value either...
A stock S has value S = 2 today and in one year the value either doubles or halves. Assuming interest rates are zero: (a) Show how to replicate a call option with strike at 2.5 using the stock and the riskless asset and calculate the price of the option today (b) Similarly replicate the put option struck at 2.5 and calculate its value today.
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2. Arbitrage on the tree A stock that pays no dividends has price today of 100. In one year's time the stock is worth 110 with probability 0.75, and 85 with probability 0.25. The one-year annually compounded interest rate is 5%. a) Calculate the forward price of the stock for a forward contract with maturity one year. (b) Calculate the price of a one-year European put option with strike 100. (c) Suppose you observe that the put option in part...
12- Today, I bought 1 call contract on GM with one-year to maturity with an exercise price of $50 at a premium of $5 when GM stock price was $50. Two month later, GM stock price closed at $62 while the option premium was $15 at which time I closed my position by selling my call option. Compute my gain/loss. PS: In all questions above X denotes the exercise price of the options, C=call premium, P=put premium, and S=stock price.
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