Draw a payoff diagram, Cost Accounting

Currently the stock of Backstreet Toys (BT) is selling for $20 per share and the risk free rate is5%.

a) Draw a payoff diagram for each of the following 3 portfolios:

i. Buy one share of BT stock and finance the purchase by borrowing $20 for 1 year at the risk free rate.

ii. Buy one call option on BT stock with a strike price of $21 that expires in 1 year. Sell a put option on

BT stock with a strike price of $21 that also expires in 1 year.

iii. Enter into a one-year forward contract on BT. This contract obligates you to buy one share of BT stock

for $21 at the end of 1 year, no matter what the price turns out to be.

b) Using the principle of no-arbitrage and what you know about BT's current stock price and the riskfree rate, is the price of the call option in (ii) greater than, less than or equal to the price of the put in (ii).

Similarly, what can you conclude about the cost today of entering into the forward contract described in (iii)?

Posted Date: 3/4/2013 7:34:06 AM | Location : United States







Related Discussions:- Draw a payoff diagram, Assignment Help, Ask Question on Draw a payoff diagram, Get Answer, Expert's Help, Draw a payoff diagram Discussions

Write discussion on Draw a payoff diagram
Your posts are moderated
Related Questions
One item a computer store sells is supplied by a vendor who handles only that item. Demand for that item recently changed, and the store manager must determine when to replenish it

You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After Initial examination of the proposal, you note that there are 500 material items, but y

Igor and Angela were married in 2005, separated in 2011, and divorced recently. At the time of marriage, each had some investments and personal assets. They both worked during the

Margin of safety Measures the sensitivity of budgeted sales volume compared with break-even sales volume. The difference between level of sales activity achieved and level of s

Candler Inc a computer software development firm has stock outstanding as follows: 40,000 shares of $2 nonparticipating, noncumulative preferred stock of $10 par, and 250,000 share

Example of Batch Costing The budgeted variable overheads of a company for the year of 2001 are as given as: Department                Overhead (shs.)

Materials Transaction i. Purchase of Materials on Credit ii. Return of Materials to Suppliers iii. Purchase of Materials in Cash. The above transactions affect both t

CVP Analysis in Situations Subject To Change Revenue and Cost will change and also sales volume because of a number of factors involving: a) Increased competition may need

Accrued liabilities show expenses or obligations incurred in the earlier accounting period but the payment for similar will be made in the subsequent period. In several cases where

The next year's budget for Benny, Inc., is given below: Product 1-2 Sales $945,000-688500 Variable costs 459,900-297,000 Fixed costs 300,000-3