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Chapter013

# Chapter013 - The Theory of Interest Solutions Manual...

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The Theory of Interest - Solutions Manual 154 Chapter 13 1. Stock Option ( a ) 84 80 0 2 5% 100% 80 2 −− =+ =− ( b ) 80 80 0 2 0% 100% 80 2 == ( c ) 78 80 2 2 2.5% 0% 80 2 = ( d ) 76 80 4 2 5% 100% 80 2 ( e ) \$78, from part ( c ) above ( f ) 20\$ 2 TVP P IVP =−= 2. ( a ) 100 98 \$2 IVC S E =−= − = ( b ) 62\$ 4 T V CCI V C ( c ) \$0 since IVP S E =≥ ( d ) 2 TVP P IVP 3. Profit position = Cost of \$40 call + Cost of \$45 call + Value of \$40 call Value of \$45 call ( a ) 3100 \$ 2 −++ − =− ( b ) 2 ( c ) 312 . 5 00 \$ . 5 0 −++ − = ( d ) 3150\$ 3 −++ − = ( e ) 311 05\$ 3 4. See answers to the Exercises on p. 623. 5. ( a ) Break-even stock prices = ECP + + and . ( b ) Largest amount of loss = CP +

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The Theory of Interest - Solutions Manual Chapter 13 155 6. ( a ) The shorter-term option should sell for a lower price than the longer-term option. Thus, sell one \$5 option and buy one \$4 option. Adjust position in 6 months. ( b ) If 50 S in 6 months, profit is: \$1 if 48 S = in one year. \$1 if 50 S = in one year. \$3 if 52 S = in one year. If 50 S > is 6 months, profit is: \$3 if 48 S = in one year. \$1 if 50 S = in one year. \$1 if 52 S = in one year. 7. See answers to the Exercises on p. 623. 8. P increases as S decreases, the opposite of calls. P increases as E increases, the opposite of calls. P increases at t increases, since longer-term options are more valuable than shorter- term options.
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Chapter013 - The Theory of Interest Solutions Manual...

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