Suppose that the continuously compounded expected return on the stock is a and that the stock...
The current price of stock XYZ is $100. Stock pays dividends at the continuously compounded yield rate of 4%. The continuously compounded risk-free rate is 5% annually. In one year, the stock price may be 115 or 90. The expected continuously compounded rate of return on the stock is 10%. Consider a 105-strike 1-year European call option. Find the continuously compounded expected rate of discount γ for the call option.
1a) The current price of a stock is $43, and the continuously compounded risk-free rate is 7.5%. The stock pays a continuous dividend yield of 1%. A European call option with a exercise price of $35 and 9 months until expiration has a current value of $11.08. What is the value of a European put option written on the stock with the same exercise price and expiration date as the call? Answers: a. $5.17 b. $3.08 c. $1.49 d. $2.50...
6. Suppose that continuously compounded returns are normally distributed. A stock currently trades for $100, with an expected return of 12% and standard deviation of 20%. What is the probability distribution for the rate of return (with continuous compounding) to be earned over a one-year period?
14. The current price of a non-dividend paying stock is 40 and the continuously compounded risk-free interest rate is 8%. You are given that the price of a 35-strike call option is 3.35 higher than the price of a 40-strike call option, where both options expire in 3 months. Calculate the amount by which the price of an otherwise equivalent 40-strike put option exceeds the price of an otherwise equivalent 35-strike put option. (A) B) 1.55 1.65 1.75 3.25 3.35
Suppose Disney Inc. is expected to pay a $5 dividend in one year. If the dividend is expected to grow at 8% per year and the required return is 12%, what is the price? Versace Company is expected to pay a dividend of $5 next period and dividends are expected to grow at 6% per year. The required return is 15%. What is the current price? Babe Clothing Company is expected to pay a dividend of $5 next period and dividends...
Thanks anyway! For a stock, you are given: •The stock’s price is 40. •The continuously compounded risk-free interest rate is 5%. •The stock’s continuous dividend rate is 2%. •A one-year 35-strike European call option has premium of 10. •A one-year 45-strike European call option has premium of 2. Determine the lowest and highest arbitrage-free premiums for a one-year 40-strike European put option on the stock.
The continuously compounded annual return on a stock is normally distributed with a mean of 18% and standard deviation of 20%. With 95.44% confidence, we should expect its actual return in any particular year to be between which pair of values? Hint: Refer to Figure 5.3. −22.0% and 58.0% −12.0% and 58.0% −42.0% and 78.0% −2.0% and 38.0%
A 1-year American put option on a stock is modeled with a 2-period binomial tree. Given that the price of the stock is 100, the strike price is 105. σ = 0.4. The continuously compounded risk-free rate is 6%. The stock pays no dividends.Determine the risk-neutral probability and the put premium
Consider a European put option on the stock of XYZ, with a strike price of $30 and two months to expiration. The stock pays continuous dividends at the annual continuously com- pounded yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either $18 per share or $29 per share. Use the one-period binomial option pricing to find...
You observe that the stock XYZ is currently trading at $8.50. The continuously compounded volatility is 20% p.a. The stock is due to pay a $0.25 dividend going ex-dividend in 1 month’s time. 3-month European call and put options written on XYZ trading at $0.65 and $0.45 respectively. The strike price on both options is $8.00. The continuously compounded risk free rate is 6%pa. a) Which theoretical Black-Scholes condition is violated? b) Clearly describe the arbitrage process you would perform...