Reference no: EM131886481
Suppose that Alphabet stock is trading at $1,000 on Wednesday, 10/25/2017. An at-the-money call option exists that expires 3 weeks from that date, on 11/15/2017. Assume that every week, Alphabet stock will either increase or decrease by a factor of 1.05. That is, in one week, the price will either be $1,000*1.05 = $1,050 or $1,000/1.05 = $952.38. You can assume that the risk-free rate is 5% per year. You can assume that this is either the continuously compounded rate or the APY.
a. At the end of three weeks, what possible prices can the stock take?
b. At the stock prices listed in (a), what is the value of the call option at expiration?
c. Draw this scenario as a multi-step binomial tree.
d. At any particular node, what is the risk-neutral probability that the stock price will increase? Write this probability, as well as the probability of a price decrease, on the tree from part (c).
e. Complete the tree by finding the price of the call option at every node.
|
Settled your futures agreement at that price
: The price settled on March 21 at $1,180, and on March 21, you settled your futures agreement at that price. Did you gain or lose? By how much?
|
|
What is the dollar value of the mistake
: What is the dollar value of the mistake in your answer because you used the wrong discount rate?
|
|
What is the basis of minnow assets in the hands of whale
: Whale Corp acquires the assets of Minnow Corp for $100,000 (FMV) of Whale Corp voting stock. What is the basis of minnow’s assets in the hands of Whale?
|
|
Considering new three-year expansion project
: H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,250,000.
|
|
What is the value of the call option at expiration
: At the stock prices listed in (a), what is the value of the call option at expiration? Draw this scenario as multi-step binomial tree.
|
|
What is the required return on the company stock
: The company has a dividend yield of 7.4 percent. What is the required return on the company's stock?
|
|
Explain the risks and rewards facing firm
: Explain the risks and rewards (advantages and disadvantages) facing a firm as it decides how to fund a 15-year project to finance a new facility.
|
|
Public offering are firm commitment and best efforts
: Two types of underwriting for an initial public offering are "firm commitment" and "best efforts."
|
|
What is current share price for stock
: Universal Laser, Inc., just paid a dividend of $3.25 on its stock. What is the current share price for the stock?
|