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We are interested in pricing a 1-year put option on cisco with a strike price of K=100. Currently CISCO is trading at 80 and the risk free rate is 5% per annum. In addition we assume that (i) CISCO will not pay any dividend and (ii) there are no other derivatives that are trading including other call or put options.
b) In this part we no longer assume a Binomial structure and future stock price can take arbitrary non-negative values. For each of the following possible prices for the put option determine whether it admits an arbitrage strategy.: (i) 100 (ii) 60 (iii) 10 In case there is an arbitrage, describe explicitly such strategy and calculate arbitrage profit today as well as payoff diagram in 1 year; in case there is not you are not required to prove it.
c) Suppose now that there is also a call option with a strike of k=90 that costs $10. For each of the following possible prices for the put option determine whether it admits an opportunity strategy: (i) 20 (ii) 30 Again as in part b), in case there is an arbitrage, describe explicitly such strategy and calculate arbitrage profit today as well as payoff diagram in 1 year; in case there is not you are not required to prove it.
Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer pr..
Hedging with options removes both upside and downside performance potentials. Options are used to insure an existing portfolio. For example, buying a put on an asset (or portfolio) reduces the risk of loss in case of a drop in value of the asset.
For the case showing in the following table calculate the future value of the single cash flow deposited today at the end of the deposit period of the interest is compounded annually at the rate specified. Single cash flow= 25000 Interest rate 15% De..
S&P 400 Midcap (CME) - Contract size: $500 x Index Open High Low Settle Chg High Low Volume Mar 502.25 506.30 497.25 505.75 +2.50 532.50 474.15 1,432 Apr 501.25 508.75 496.75 504.30 –1.25 540.35 478.30 867 You had purchased last week eight March S&P ..
Advantage First Corporation has sales of $4,964,060; income tax of $514,886; the selling, general and administrative expenses of $224,035; depreciation of $368,851; cost of goods sold of $2,900,500; and interest expense of $101,207. What is the amoun..
ABC had assets of $15 million last year; sales were $18 million; liabilities plus accruals that increased spontaneously with sales was 8% of assets; net income was $275,000 of which $120,000 was paid out in the form of dividends. What is ABC's capita..
Bond Valuation: -How much should you be willing to pay for the bond if the investor's required rate of return is 10 percent?
The Nobel Prize winning Modigliani and Miller Theory states that a firm’s capital structure does not matter. It is based on three key assumptions:
Six Twelve, Inc., is considering opening up a new convenience store in downtown New York City. The expected annual revenue at the new store is $680,000. What is the expected incremental cash flow related to working capital when the store is opened?
You have $21,072.44 in a brokerage account, and you plan to deposit an additional $6,000 at the end of every future year until your account totals $210,000. You expect to earn 11% annually on the account. How many years will it take to reach your goa..
On January 2, 2003, Page Corporation acquired a 90% interest in Salcedo Company for $3,500,000. At that time Salcedo Company had capital stock of $2,250,000 and retained earnings of $1,250,000. Assuming interest is paid annually, prepare a Computatio..
Classify the critical points as relative maxima, relative minima, or horizontal points of inflection,
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