Find out current stock price and the riskfree rate, Econometrics

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: 3/16/2013 5:35:57 AM | Location : United States







Related Discussions:- Find out current stock price and the riskfree rate, Assignment Help, Ask Question on Find out current stock price and the riskfree rate, Get Answer, Expert's Help, Find out current stock price and the riskfree rate Discussions

Write discussion on Find out current stock price and the riskfree rate
Your posts are moderated
Related Questions

Consider a linear model to explain pricing of houses: Price = ß0 + ß1lotsize + ß2sqrft + ß3bdrms + u (1) E(u| lotsize, sqrft, bdrms)=0 Var (u| lotsize, sqrft, bdrms)=s2 lotsize4

HI, I am currently working on my econometrics assignment which requires me to replicate the result of a published paper. I have been given the same data set as the paper therefore

Consider the study of the effect of public-sponsored training programs. As argued in public programs of training and employment are designed to improve participant's productive ski

how might short and long term goals between a business and the government differ?

How can a person achieve his goal for development?Explain it with 5 examples.

The attached Eviews results are for a model who has a professional career (dependent variable = pro (1 if respondent has a professional career, 0 otherwise). The data is the 1979 c



how run ditributed lag model and how select lag length?