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
Choose a share from a market such as LSE, NYSE, NASDAQ, etc. [Data sources could be Datastream, Google Finance or others]. Prepare a report which involves the following aspects:

Hi, I''m a PhD student in empirical finance I’m trying to conduct bivariate nonlinear conintegration tests using threshold Vector Error Correction (TVEC) methodology (Hansen and Se

Hi I am currently working on my econometrics coursework which is to replicate a published paper. I was given the same data set as the paper and suppose to get the same answer as th

Question 1: Explain the main drivers of globalisation and ascertain whether they have helped to reduce the gap between the rich and the poor countries. Question 2: Disc


estimate the determinants of demand of a firm or several firms within a particular industry or country


You are gambling. There is a white urn in front of you, which contains a total of 100 black and white balls. You are blindfolded, get to pick one ball randomly, and see which color

The  firm  is  considering  manufacturing  a  second  product  in  its  factory alongside the first. The demand functions for the two products are: Q d1 =180 - 4P 1 Q d2 =90

I am trying to apply weighted least squares but Im not getting a very good fit when I regress the residuals on the variables so I don''t think the weights will be very good