Investments & Securities Chapter 16 2 you are considering purchasing a put option on a stock with a current price of $33. the exercise price is $35

46. A one-dollar increase in a stock’s price would result in __________ in the call option’s value

of __________ than one dollar.

47. A hedge ratio of .70 implies that a hedged portfolio should consist of ________.

48. If a stock price increases, the price of a put option on the stock will __________ and the

price of a call option on the stock will __________.

49. The current stock price of Alcoa is $70, and the stock does not pay dividends. The

instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa’s stock

is 40%. You want to purchase a call option on this stock with an exercise price of $75 and an

expiration date 30 days from now. Based on the Black-Scholes OPM, the call option’s delta will be

__________.

50. The current stock price of Alcoa is $70, and the stock does not pay dividends. The

instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa’s stock

is 40%. You want to purchase a put option on this stock with an exercise price of $75 and an

expiration date 30 days from now. According to the Black-Scholes OPM, you should hold

__________ shares of stock per 100 put options to hedge your risk.

51. The current stock price of International Paper is $69, and the stock does not pay

dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard

deviation of International Paper’s stock is 25%. You want to purchase a call option on this stock

with an exercise price of $70 and an expiration date 73 days from now.

Using the Black-Scholes OPM, the call option should be worth __________ today.

52. The current stock price of International Paper is $69, and the stock does not pay

dividends. The instantaneous risk-free rate of return is 10%. The instantaneous standard

deviation of International Paper’s stock is 25%. You want to purchase a call option on this stock

with an exercise price of $70 and an expiration date 73 days from now.

Using the Black-Scholes OPM, the put option should be worth __________ today.

53. The current stock price of Johnson & Johnson is $64, and the stock does not pay

dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation

of J&J’s stock is 20%. You want to purchase a call option on this stock with an exercise price of

$55 and an expiration date 73 days from now.

Using the Black-Scholes OPM, the call option should be worth __________ today.

54. The current stock price of Johnson & Johnson is $64, and the stock does not pay

dividends. The instantaneous risk-free rate of return is 5%. The instantaneous standard deviation

of J&J’s stock is 20%. You want to purchase a call option on this stock with an exercise price of

$55 and an expiration date 73 days from now.

Using the Black-Scholes OPM, the put option should be worth __________ today.

55. The stock price of Ajax Inc. is currently $105. The stock price a year from now will be

either $130 or $90 with equal probabilities. The interest rate at which investors can borrow is 10%.

Using the binomial OPM, the value of a call option with an exercise price of $110 and an

expiration date 1 year from now should be worth __________ today.

56. The stock price of Bravo Corp. is currently $100. The stock price a year from now will be

either $160 or $60 with equal probabilities. The interest rate at which investors invest in riskless

assets is 6%. Using the binomial OPM, the value of a put option with an exercise price of $135 and

an expiration date 1 year from now should be worth __________ today.

57. If you have an extremely “bullish” outlook on the stock market, you could attempt to

maximize your rate of return by ________________.

58. Which one of the following will increase the value of a put option?

59. You find the option prices for three June call options on the same stock. The 95 call has

an implied volatility of 25%, the 100 call has an implied volatility of 25%, and the 105 call has an

implied volatility of 30%. If you believe this represents a mispricing situation. you may want to

____________________________.

60. You are considering purchasing a call option with a strike price of $35. The price of the

underlying stock is currently $27. Without any further information, you would expect the hedge

ratio for this option to be _______________.

61. According to the put-call parity theorem, the payoffs associated with ownership of a call

option can be replicated by __________________.

62. You are considering purchasing a put option on a stock with a current price of $33. The

exercise price is $35, and the price of the corresponding call option is $2.25. According to the put–

call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the

value of the put should be ____________.

63. The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and

Atlantis Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of $40

and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp. stock

with an exercise price of $40 and an expiration date 6 months from now should be worth

__________ today.

64. The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper

Corp. pays no dividends. A put option on Harper Corp. stock with an exercise price of $30 and an

expiration date 73 days from now is worth $.95 today. A call option on Harper Corp. stock with an

exercise price of $30 and the same expiration date should be worth __________ today.

65. A call option on Juniper Corp. stock with an exercise price of $75 and an expiration date 1

year from now is worth $3 today. A put option on Juniper Corp. stock with an exercise price of $75

and an expiration date 1 year from now is worth $2.50 today. The risk-free rate of return is 8%,

and Juniper Corp. pays no dividends. The stock should be worth __________ today.

66. You would like to hold a protective put position on the stock of Avalon Corporation to lock

in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next

year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately,

no put options are traded on Avalon Co.

Suppose the desired put options with

X

= 50 were traded. What would be the hedge ratio for the

option?