How would you take advantage of this great opportunity? Now suppose the option is a European call. What would you do?
Not what you're looking for?
4 Questions for you to familiarize with option and warrants, especially the Call/Put Parity, formula and relations.
Question 1
Pintail's stock price is currently $200. A one-year American call option has an exercise price of $50 and is priced at $75. How would you take advantage of this great opportunity? Now suppose the option is a European call. What would you do?
Question 2
In June 2001 a six-month call on Intel stock, with an exercise price of $22.50, sold for $12.30. The stock price was $27.27. The risk-free interest rate was 3.9 percent. How much would you be willing to pay for a put on Intel stock with the same maturity and exercise price?
Question 3
Suppose that Mr. Colleoni borrows the present value of $100, buys a six-month put
option on stock Y with an exercise price of $150, and sells a six-month put option on Y with an exercise price of $50. Suggest two other combinations of loans, options and the underlying stock that would give Mr. Colleoni the same payoffs.
Question 4
a.) If you can't sell a share short, you can achieve exactly the same final payoff by a combination of options and borrowing or lending. What is this combination?
b.) Now work out the mixture of stock and options that gives the same final
payoff as a risk-free loan.
Purchase this Solution
Solution Summary
Here is just a sample of what you will find in the solution:
"This implies that, in order to replicate a short sale of a share of stock, you would purchase a put, sell a call, and borrow the present value of the exercise price."
Solution Preview
Question 1
You would buy the American call for $75, exercise the call immediately in
order to purchase a share of Pintail stock for $50, and then sell the share of
Pintail stock for $200. The net gain is: [$200 - ($75 + $50)] = $75.
If the call is a European call, you should buy the call, deposit in the bank an
amount equal to the present value of the exercise price, and sell the stock
short. This produces a current cash flow equal to: [$200 - $75 - ($50/1 + r))].
At the maturity of the call, the action depends on whether the stock price is
greater than or less than the exercise price. If the stock price is greater than
$50, then you would exercise the call (using ...
Purchase this Solution
Free BrainMass Quizzes
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Motivation
This tests some key elements of major motivation theories.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.