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Net profits of options and securities using CAPM

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.

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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

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