Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
67. 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. How much would it cost to purchase?
68. 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.
What would have been the cost of a protective put portfolio?
69. 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.
What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would
be provided by a protective put with
X
= $50?
70. You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not
pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is
that either the option is _________ or the volatility you input into the model is too _________.
71. What combination of variables is likely to lead to the lowest time value?
72. The time value of a call option is likely to decline most rapidly ________ days before
expiration?
73. The fact that American put values may not equal the price implied by put-call parity is
attributable to the possibility of what event?
74. Calculate the price of a call option using the Black Scholes model and the following data:
stock price = $47.30, exercise price = $50, time to expiration = 85 days, risk-free rate = 3%,
standard deviation = 35%.
75. Calculate the price of a European call option using the Black Scholes model and the
following data: stock price = $56.80, exercise price = $55, time to expiration = 15 days, risk-free
rate = 2.5%, standard deviation = 22%, dividend yield = 8%.
76. The intrinsic value of an out-of-the-money call option ___________.
77. A call option has an exercise price of $30 and a stock price of $34. If the call option is
trading for $5.25, what is the intrinsic value of the option?
78. A call option has an exercise price of $35 and a stock price of $36.50. If the call option is
trading at $2.25, what is the time value embedded in the option?
79. What aspect of the time value of money does the factor of
e
represent in the Black-
Scholes option value formula?
80. Suppose you purchase a call and write a put on the same stock with the same exercise
price and expiration. If prices are at equilibrium, the value of this portfolio is ________.
81. A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an
exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10.
The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are
undervalued.
If you want to construct a riskless arbitrage to exploit the mispriced puts, you should
____________.
82. A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an
exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10.
The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are
undervalued.
If you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be
_____.
83. The option smirk in the Black-Scholes option model indicates that __________.
84. A put option has a strike price of $35 and a stock price of $38. If the call option is trading
at $1.25, what is the time value embedded in the option?
85. Hedge ratios for long puts are always __________.
