Ch25+Answers+to+assigned+problems++v7

Ch25+Answers+to+assigned+problems++v7 - CHAPTER 25 OPTIONS...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 25 OPTIONS AND CORPORATE SECURITIES 2. (LO1) a. The calls are in the money. The intrinsic value of the calls is $4 = $94 - $90. b. The puts are out of the money. The intrinsic value of the puts is $0. c. The Mar call and the Oct put are mispriced. The call is mispriced because it is selling for less than its intrinsic value. If the option expired today, the arbitrage strategy would be to buy the call for $3.20, exercise it and pay $90 for a share of stock, and sell the stock for $94. A riskless profit of $0.80 results. The October put is mispriced because it sells for less than the July put. To take advantage of this, sell the July put for $3.90 and buy the October put for $3.65, for a cash inflow of $0.25. The exposure of the short position is completely covered by the long position in the October put, with a positive cash inflow today. 3. (LO1) a. Each contract is for 100 shares, so the total cost is: Cost = 10(100 shares/contract)($7.90) Cost = $7,900 b. If the stock price at expiration is $140, the payoff is: Payoff = 10(100)($140 – 112) Payoff = $28,000 If the stock price at expiration is $125, the payoff is: Payoff = 10(100)($125 – 112) Payoff = $13,000 c. Remembering that each contract is for 100 shares of stock, the cost is: Cost = 10(100)($4.70) Cost = $4,700 The maximum gain on the put option would occur if the stock price goes to $0. We also need to subtract the initial cost, so: Maximum gain = 10(100)($112) – $4,700 Maximum gain = $107,300 If the stock price at expiration is $102, the position will have a profit of: Profit = 10(100)($112 – 102) – $4,700 Profit = $10,000 – $4,700 = $5,300 d. At a stock price of $104 the put is in the money. As the writer you will make: Net loss = $4,700 – 10(100)($112 – 104) Net loss = –$3,300 25-1
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
At a stock price of $134 the put is out of the money, so the writer will make the initial cost: Net gain = $4,700 At the breakeven, you would recover the initial cost of $4,700, so: $4,700 = 10(100)($112 – S T ) S T = $107.30 For terminal stock prices above $107.30, the writer of the put option makes a net profit (ignoring transaction costs and the effects of the time value of money). 4. (LO2) a. The value of the call is the stock price minus the present value of the exercise price, so: C 0 = $85 – 75/1.06 C 0 = $14.25 b. Using the equation presented in the text to prevent arbitrage, we find the value of the call is: $85 = [($95 – 80)/($95 – 90)]C 0 + $80/1.06 C 0 = $3.17 5. (LO2) a. The value of the call is the stock price minus the present value of the exercise price, so: C 0 = $70 – $45/1.05 C 0 = $27.14 b.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern