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Another variation of the straddle is called a strangle. A strangle is the purchase of a call with a higher exercise price and a put with a lower exercise price.
Evaluate the strangle strategy by examining the purchase of the August 165 put and 170 call.
As in the problems above, determine the profits for stock prices of 150, 155, 160, 165, 170, 175, and 180. Hold the position until expiration and graph the results.
Find the breakeven stock prices at expiration. Explain why one would want to use a strangle.
You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding. Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment's fu..
Suppose you purchase eight put contracts on Testaburger Co. The strike price is $35, and the premium is $2.20. If, at expiration, the stock is selling for $26 per share, what are your put options worth? What is your net profit?
Suppose that there are two independent economic factors, F1 and F2. The risk-free rate is 9%, and all stocks have independent firm-specific components with a standard deviation of 49%. What is the expected return–beta relationship in this economy?
What is the present value (PV) of an investment?
A bank has $7.5 mil in reserves, $35 mil in bank loans, and $45 mil of deposits. If the reserve requirement is 15%, what is the bank’s reserve position? What is the maximum dollar amount of loans the bank could make? What would happen to the nation’s..
The currency of country A contains .1 ounce of gold, whereas the currency of country B contains .025 ounce of gold. What will be the par exchange rate between the two countries?
ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt market; If the amount each firm wants to borrow is 100m ..
Your firm is considering a new investment proposal and would like to calculate the weighted average cost of capital. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1% that is paid semi annually. The bond ..
A manager believes his firm will earn a 11.50 percent return next year. His firm has a beta of 1.40, the expected return on the market is 9.0 percent, and the risk-free rate is 4.0 percent. Compute the return the firm should earn given its level of r..
Duke Power is about to issue a new 10 year bond with a coupon rate of 6.25%. The bond has been rated AA by Standard & Poor's. You observe that a similar bond, recently issued by a power company in Virginia is priced such that its yield-to-maturity is..
The list price of a smartphone is $384. A local Verizon dealer receives a trade discount of 23%. Find the trade discount amount and the net price.
The importing bank's acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 6 percent. Determine the amount the exporter will receive if he holds the B/A until maturity. Determine the amount the exporter will receive if he ..
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