fm9 4 - The present value of $10.40 at the daily compounded...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers and Solutions: 9 - 4 9-7 The stock’s range of payoffs in six months is $18 - $13 = $5. At expiration, the option will be worth $18 - $14 = $4 if the stock price is $18, and zero if the stock price $13. The range of payoffs for the stock option is $4 – 0 = $5. Equalize the range to find the number of shares of stock: Option range / Stock range = $4/$5 = 0.8. With 0.8 shares, the stock’s payoff will be either 0.8($18) = $14.40 or 0.8($13) = $10.40. The portfolio’s payoff will be $14.4 - $4 = $10.40, or $10.40 – 0 = $10.40.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: The present value of $10.40 at the daily compounded risk-free rate is: PV = $10.40 / (1+ (0.06/365)) 365/2 = $10.093. The option price is the current value of the stock in the portfolio minus the PV of the payoff: V = 0.8($15) - $10.093 = $1.907 .$1.91. SOLUTION TO SPREADSHEET PROBLEMS 9-8 The detailed solution for the problem is available in the file Solution for FM12 Ch 09 P08 Build a Model.xls on the textbooks web site....
View Full Document

This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

Ask a homework question - tutors are online