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
My question is that when we use Impulse response function and how to use it. Is it used along with some other methodology. What is the meaning of graphs of IRF?

Calculate the incremental profit Electron Control would earn by customizing its instruments and marketing directly to end users.

a. If 10,000 two-liter bottles of Pepsi are currently being demanded in your community each month, and the price increases from $1.90 to $2.10 per bottle, what will happen to quant

In a study relating college grade point average to time spent in various activities, students are asked how many hours they spend each week in four activities: studying, sleeping,


if there is multicollinearity so why we can not estimate the value of parameters?

what are factors contributing to the long run trend interms of trade of developing countries?

Problem: a) Using a financial or economics theory, determine a simultaneous structural model and a recursive model, explaining each variable used in the models. b) Using

Suppose years of schooling, s , is the only variable that affects earnings. The equations for the weekly salaries of male and female workers are given by w m = 500 + 100 s and

Can you explain the basic introduction of this methodology?