A stock is trading at $69. You believe there is a 60% chance the price of the stock will increase by 20% overthe next 3 months. You believe there is a 10% chance the stock will drop by 5%, and you think there is only a30% chance of a major drop in price of 60%. At-the-money 3-month puts are available at a cost of $840 percontract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?Multiple Choice$3,300-$436.50$495$0

Information Provided: Stock price = $69 Cost of contract = $840

A stock is trading at $69. You believe there is a 60% chance the price of the stock will increase by 20% over the next 3 months. You believe there is a 10% chance the stock will drop by 5%, and you think there is only 30% chance of a major drop in price of 60%. At-the-money 3-month puts are available at a cost of $840 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

A stock is trading at $69. You believe there is a 60% chance the price of the stock will increase by 20% over the next 3 months. You believe there is a 10% chance the stock will drop by 5%, and you think there is only 30% chance of a major drop in price of 60%. At-the-money 3-month puts are available at a cost of $840 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You expect the price of a stock to increase by 20% in the following year, with a standard deviation of 30%. The stock currently trades at $50. You pursue a strategy of buying 100 shares of the stock on margin. The initial margin requirement is 50%. The annual interest on margin debt is 5% per year. (a) What is the expected return and standard deviation of your strategy? (assume there is no margin call.) (b) The maintenance margin is 30%. Six months after you establish your trade, you receive a margin call. What is the price of the stock when this happens?
Suppose stock A is priced at $30/share and the company will pay a dividend of $0.30/share after one month. An investor short sells 50 shares of A and after three months covers the short position when the stock prices is $33.30/share. The continuously compounded risk-free rate is 5%. Calculate the 3-month profit.
Suppose that a Stock has a current price of $40 and that in 6-months it may go up by 20% or down by 15%. Assuming the annual risk-free rate is 3%, compounded semi-annually, answer the following: a) Calculate the value of a $35 Call with two 6-month periods (i.e. 12-months) to expiry using the Risk Neutral Approach. b) Calculate the value of a $35 Put using Put-Call Parity. c) Without performing any calculations, explain in 1-2 sentences what you would expect to happen to the value of the Call and Put if the Exercise Price decreased. d) Do this question in the blank space below - i.e. DO NOT answer this sub-part (d) in Excel. Only your solution written below will be marked: Suppose the market price of a 12-month Call with an exercise price of $35 is $6.00. The Put price is as you calculated in (b) above. Using a payoff table, illustrate an arbitrage opportunity as a result of the mispricing of the Call. Show your workings to 3 decimal places. (If you need more space, please use the back…
Momo, a fast-growing company, will make an earnings announcement three months from now. But you do not know whether it will be positive or negative (i.e., the stock price will go up or down). The current price of the stock is $30 per share. A three-month call with an exercise price of $30 costs $5. A put with the same exercise price and expiration date costs $5. Buy three month call option @Strike price $30 ; pay premium $5 Buy three month put option @Strike price $30 ; pay premium $5 Total premium paid =$5+$5 = $10 b. Construct a table and a graph to show the profit/loss (P/L) from the option strategy.
Momo, a fast-growing company, will make an earnings announcement three months from now. But you do not know whether it will be positive or negative (i.e., the stock price will go up or down). The current price of the stock is $30 per share. A three-month call with an exercise price of $30 costs $5. A put with the same exercise price and expiration date costs $5. a. What would be a simple options strategy to bet on the stock price volatility?
You have a stock trading at $100. The stock follows a lognormal distribution: with drift of 20% and volatilty of 30%. The risk free rate is 2%. What is the risk-neutral probability for a 3- month 100 put to expire in the money? Find N(-d2). Compare the results.
Suppose that you are a trader at the stock market.T-Mobile’s stocks currently trade at $45 and the expectedreturn is 9%. You have information that leads you to believethat by the end of year the company’s returns will bearound 40%. Are your expectations optimal? How will yourbehavior influence the stock price?
You are bullish on XYZ stock. The current market price is $100 per share, and you have $10,000 of your own to invest. You borrow an additional $10,000 from your broker at an interest rate of 8% per year and invest $20,000 in the stock. WHAT IS THE margin call if the maintenance margin is 30%? Assume the price IS $115 one year LATER.
You just purchased a share of stock in ABC Corporation, at a cost of $1,400. Your broker has indicated that there’s a 25% probability that the stock will end the year at a price of $1,000, a 60% probability that it will end at $2,000 is .60, and a 15% probability that it will end at $5,000. Calculate the mean, variance, and standard deviation for theinvestment’s end-of-year anticipated dollar value. In your view, is this a wise investment? Why or why not?
Consider a stock currently priced at $40. Assume that in each period of one month, the stock could either appreciate or depreciate by 10% . The risk - free rate is 2% per annum. What would be the value of a 2 - month ATM Asian put?
Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for $6? $40 $45 $50 $55 $60
You are a financial analyst and are comparing two stocks. For Stock A, you expect that it will pay a dividend of 60 dollars next year and you expect these dividends to grow at a rate of 3% per annum. The required return on this stock is 10%. For Stock B, you expect that it will pay constant dividends of 5 with a required return on Stock B of 12%. What is the difference in stock price? Calculate the difference as price of Stock A minus the price of Stock B.

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