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$1,000.)
77.
A call option with an exercise price of $31 and 6 months to expiration has a
price of $3.77. The stock is currently priced at $17.99, and the risk-free rate
is 3 percent per year, compounded continuously. What is the price of a put
option with the same exercise price and expiration date?
78.
A call option matures in nine months. The underlying stock price is $90, and
the stock's return has a standard deviation of 19 percent per year. The risk-
free rate is 3 percent per year, compounded continuously. The exercise
price is $0. What is the price of the call option?
79.
A stock is currently priced at $45. A call option with an expiration of one
year has an exercise price of $60. The risk-free rate is 14 percent per year,
compounded continuously, and the standard deviation of the stock's return
is infinitely large. What is the price of the call option?
80.
Sunburn Sunscreen has a zero coupon bond issue outstanding with a
$10,000 face value that matures in one year. The current market value of
the firm's assets is $10,600. The standard deviation of the return on the
firm's assets is 32 percent per year, and the annual risk-free rate is 7
percent per year, compounded continuously. What is the market value of
the firm's debt based on the Black-Scholes model?
(Round your answer to
the nearest $100.)
81.
Frostbite Thermal Wear has a zero coupon bond issue outstanding with a
face value of $20,000 that matures in one year. The current market value of
the firm's assets is $23,000. The standard deviation of the return on the
firm's assets is 52 percent per year, and the annual risk-free rate is 6
percent per year, compounded continuously. What is the market value of
the firm's equity based on the Black-Scholes model?
(Round your answer to
the nearest $100.)
Essay Questions
82.
Explain why the equity ownership of a firm is equivalent to owning a call
option on the firm's assets.
83.
Explain how option pricing theory can be used to argue that acquisitive
firms pursuing conglomerate mergers are not acting in the shareholders'
best interest.
84.
Give an example of a protective put and explain how this strategy reduces
investor risk.
85.
Identify the five variables that affect the value of an American put option
and indicate how an increase in each of the variables will affect the value of
the put. Also indicate the common name, if any, given to each variable.
86.
Explain how an increase in T-bill rates will affect the value of an American
call and an American put.
87.
Explain why financial mergers tend to benefit bondholders more than
shareholders.
