Explore BrainMass

Explore BrainMass

    Net profits of options and securities using CAPM

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Calculating net profits of options and securities using CAPM.

    1. Calculate the net profits of each option under the following assumption. Also indicate if the option is ITM, ATM, or QTM.

    Strike price of options = $100
    Premium of options =$10

    a.) Long position of Call option if the stock price is $125 and if the stock price is $85.
    b.) Short position of Put option if the stock price is $125 and if the stock price is $85.

    2. You expect the IBM to hit $120 per share with expected dividends of $2.50 in one year. Its current price is $105 and your research estimates the beta at 1.15. Market risk premium is .07 and the U.S. T-bill is expected to yield .05. Is the IBM a good investment? Conduct security analysis using CAPM. Can you also explain your answers.

    © BrainMass Inc. brainmass.com June 3, 2020, 10:11 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/net-profits-of-options-and-securities-using-capm-219609

    Solution Preview

    Please see the attached file

    1. Calculate the net profits of each option under the following assumption. Also indicate if the option is ITM, ATM, or OTM.

    If the current market price is more than the strike price, the call option is in-the-money (ITM). If the current market price is less than the strike price, the call option is out-of-the-money (OTM). If the current market price is the same as (or close to) the strike price, the call option is at-the-money (ATM)

    A put option is in-the-money (ITM) when the strike price is higher than the market price of the underlying asset. A put option is at-the-money (ATM) when the price of the underlying security is equal (or close) to its strike price. A put option is out-of-the-money (OTM) when the price of the underlying security is greater than the strike price.

    Strike price of options = $100
    Premium of options =$10

    a.) Long ...

    Solution Summary

    The solution explains the calculation of net profits of options and securities using CAPM

    $2.19

    ADVERTISEMENT