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Week 2 Ch8 Toolkit

# Week 2 Ch8 Toolkit - Chapter 8 To l Kit for Financial...

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Unformatted text preview: 10/5/209 Chapter 8. To l Kit for Financial Options and Ap lications in Corporate Finance FINANCIAL OPTIONS (Section 8.1) FOR A CAL, AT EXPIRATION FOR A PUT, AT EXPIRATION Table 8-1 January 8, 2010, Listed Options Quotations CALS—LAST QUOTE PUTS—LAST QUOTE Closing Price Strike Price February March May February March May General Computer Corporation (GC) 53.50 50 4.25 4.75 5.50 0.65 1.40 2.20 53.50 5 1.30 2.05 3.15 2.65 r 4.50 53.50 60 0.30 0.70 1.50 6.65 r 8.0 U.S. Biotec 56.65 5 5.25 6.10 8.0 2.25 3.75 r Fod World 56.65 5 3.50 4.10 r 0.70 r r Stock Return Intital stock price \$53.50 Final stock price \$60.0 Rate of return on stock 12.1% Cal Option Return Intital cost of opiotn \$5.50 Market price of stock \$60.0 Strike price \$50.0 Profit from exercise \$10.0 Rate of Return 81.8% Stock Return Intital stock price \$53.50 Final stock price \$45.0 Rate of return on stock-15.9% Put Option Return Intital cost of option \$2.20 Market price of stock \$45.0 Strike price \$50.0 Profit from exercise \$5.0 Rate of Return 127.3% Exercise Value Stock price \$53.50 Strike price \$50.0 Exercise value \$3.50 Stock price \$53.50 Strike price \$5.0 Exercise value \$0.0 PAYOFS IN A SINGLE-PERIOD BINOMIAL MODEL Inputs: Key output: Curent stock price, P = \$40.0 \$7.71 8% Strike price, X = \$35.0 Up factor for stock price, u = 1.25 Down factor for stock price, d = 0.80 Years to expiration, t = 0.50 Number of periods until expiration, n = 1 Consider the value of the stock and the payof of the option. Figure 8-1: Binomial Payofs Strike price: X = \$35.0 Curent stock price: P = \$40.0 Up factor for stock price: u = 1.25 Down factor for stock price: d = 0.80 Ending up ending up stock price option payof P (u) = Max[P(u) − X, 0] = =A146*D135 =\$50.0 =MAX(D141-D13 ,0) =\$15.0 P,curent curent stock price option price \$40 ? Ending down ending down stock price option payof P (d) = Max[P(d) − X, 0] = =A146*D136 =\$32.0 =MAX(D151-D13 ,0) =\$0.0 THE HEDGE PORTFOLIO APROACH Step 1. Find the number of shares of stock in the hedge portfolio. = 0.83 3 P(u - d) Step 2. Find the hedge portfolio’s payof. If the stock price goes up: Portoflio payof = \$26.6 7 If the stock price goes down: Portoflio payof = \$26.6 7 Figure 8-2: The Hedge Portfolio with Riskles Payofs Strike price: X = \$35.0 Curent stock price: P = \$40.0 Up factor for stock price: u = 1.25 Down factor for stock price: d = 0.80 \$15.0 \$0.0 0.83 3 Stock price = P (u) = \$50.0 P, \$41.67 curent \$15.0 stock price \$26.67 \$40 Stock price = P (d) = \$32.0 \$26.67 \$0.0 \$26.67 Step 3. Find the present value of the hedge portfolio's riskles payof. The present value of the riskles payof disounted at the risk-fre rate (we asume daily compounding) is: Pv of payof = Payof = \$26.6 7 = \$25.6212 1.04081 Step 4. Find the option's curent value....
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Week 2 Ch8 Toolkit - Chapter 8 To l Kit for Financial...

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