CHAPTER 21

# CHAPTER 21

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Unformatted text preview: 16.98 P = 120 11.04 EX = 120 29.03 rf = 10% 14.63 t = 2 21.94 35.04 s = 100% 4. a. The future stock prices of Matterhorn Mining are: With dividend Ex­dividend Let p equal the probability of a rise in the stock price. Then, if investors are risk­neutral: (p ´ 0.25) + (1 ­ p)´(­0.20) = 0.10 p = 0.67 Now, calculate the expected value of the call in month 6. If stock price decreases to SFr80 in month 6, then the call is worthless. If stock price increases to SFr125, then, if it is exercised at that time, it has a value of (125 – 80) = SFr45. If the call is not exercised, then its value is: Therefore, it is preferable to exercise the call. The value of the call in month 0 is: b. The future stock prices of Matterhorn Mining are: With dividend Ex­dividend Let p equal the probability of a rise in the price of the stock. Then, if investors are risk­neutral: (p ´ 0.25) + (1 ­ p)´(­0.20) = 0.10 p = 0.67 Now, calculate the expected value of the call in month 6. If stock price decreases to SFr80 in month 6, then the call is worthless. If stock price increases to SFr125, then, if it is exercised at that time, it has a value of (125 – 80) = SFr45. If the call is not exercised, then its value i...
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## This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

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