1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
OLga [1]
3 years ago
9

You are attempting to value a call option with an exercise price of $100 and one year to expiration. The underlying stock pays n

o dividends, its current price is $100, and you believe it has a 50% chance of increasing to $120 and a 50% chance of decreasing to $80. The risk-free rate of interest is 10%.Based upon your assumptions, calculate your estimate of the the call option's value using the two-state stock price model.
Business
1 answer:
Anastasy [175]3 years ago
8 0

Answer:

$13.64

Explanation:

Given:

Exercise price,X = $100

Current price = $100

Value when price is up, uS = $120

Value when price is down, dS= $80

Risk free interest rate = 10%

First calculate hedge ratio, H:

H = \frac{C_u - C_d}{uS - dS}

Where,

Cu = uS - X

= 120 - 100

= $20

H = \frac{20 - 0}{120 - 80} = \ftac{1}{2}

A risk free portfolio involves one share and two call options.

Find cost of portfolio:

Cost of portfolio = Cost of stock - Cost of the two cells.

= $100 - 2C

This portfolio is risk free. The table below shows that

_______________

Portforlio 1:

Buy 1 share $80; Write 2 calls: $0; Total: ($80 + 0) $80

____________________

Portforlio 2:

Buy 1 share: $120; Write 2 calls: -$40; Total: ($120 - $40) $80

Check for oresent value of the portfolio:

Present value = \frac{80}{1 + 0.10} = 72.73

Value = exercise price - value of option

$72.73 = $100 - 2C

Find call option, C

C = \frac{100 - 72.73}{2} = 13.64

Call option's value = $13.64

You might be interested in
In January, 2021, Summit Department Store sells a gift card for $50 and receives cash. In February, 2021, the customer comes bac
PtichkaEL [24]

Answer:

Feb. 2021

  Dr Gift Card Liability         $20

     Cr Gift Card Revenue    $20

(to record revenue arisen from oustanding Gift Card Liability)

Explanation:

Under GAAP, the accounting for Gift Card is quite simple. When the gift card are sold, Gift Card Issuer receives Cash (Debit Cash) and assume the Liability (Cr Liability) to anyone owning the gift card for later providing of goods/services priced at the Cash amount that had been received.

It is not until Gift Card is redeemed that Gift Card Issuer is allowed to record revenue (Credit Revenue) as it is an actual point of time when the provide of goods/services takes place. Also at the same time, once the goods/services are provided, they Liability assumed earlier in time through Gift Card issuance will be discharged to the extent of the price of goods/services provided.

7 0
3 years ago
________ also known as business etiquette, ethical conduct, social intelligence, or soft skills, refers to a whole range of desi
Novosadov [1.4K]

Answer:

Workplace etiquette

Explanation:

The workplace etiquette is a group of behaviours that are expected from people working in the same place.

They include the proper manner to talk, dress, walk and relate with peers, dependents and superiors.

Let's see some examples of rules of workplace etiquette:

  • Be kind to everyone.
  • Respect different dresscodes.
  • Make eye contact, listen to people when they are speaking, and smile at them.
  • Be punctual.
  • Don't be messy.
  • Etc.
4 0
3 years ago
A toy manufacturer estimates the demand for a game to be 2000 per year. Each game costs $3 to manufacture, plus setup costs of $
ASHA 777 [7]

Answer:

See below

Explanation:

We will compute the above using the EOQ

EOQ = √ 2 × D × S / H

EOQ = √ 2 × 2,000 × 500 / 2 × 3

EOQ = 1,000

1,000 units of toys should be manufactured at a time

Production runs = 2,000 / 1,000

Production runs = 2

8 0
3 years ago
The appropriate discount rate for the following cash flows is 8 percent compounded quarterly. YearCash Flow 1 $800 2 800 3 0 4 1
zalisa [80]

Answer:

Total PV= $2,298.24

Explanation:

<u>First, we need to determine the effective annual rate:</u>

EAR= [1 + (i/n)]^n - 1

EAR= [1 + (0.08/4)]^4 - 1

EAR= 0.082

<u>Now, we can determine the present value of the cash flow, using the following formula:</u>

PV= ∑[Cf/(1+i)^n]

Cf1= 800 / 1.082= 739.37

Cf2= 800 / 1.082^2= 683.34

Cf3= 0

Cf4= 1,200 / 1.082^4= 875.53

Total PV= $2,298.24

3 0
3 years ago
Fowler, Inc., just paid a dividend of $2.60 per share on its stock. The dividends are expected to grow at a constant rate of 5.7
goldfiish [28.3K]

Answer:

a. Current price = $43.99

b. We have:

Price in four years = $52.03

Price in sixteen years = $101.76

Explanation:

a. What is the current price?

Using the Gordon Growth Model formula, we have:

Current price = (Dividend just paid * (100% + Dividend growth rate)) / (Rate of return – Dividend growth rate) = ($2.60 * (100% + 5.75%)) / (12% - 5.75%) = $43.99

b. What will the price be in four years and in sixteen years?

Using the Gordon Growth Model formula with an adjustment for number of years, we have:

Price in four years = (Dividend just paid * (100% + Dividend growth rate)^Number of years) / (Rate of return – Dividend growth rate) = ($2.60 * (100% + 5.75%)^4) / (12% - 5.75%) = $52.03

Price in sixteen years = (Dividend just paid * (100% + Dividend growth rate)^Number of years) / (Rate of return – Dividend growth rate) = ($2.60 * (100% + 5.75%)^16) / (12% - 5.75%) = $101.76

8 0
3 years ago
Other questions:
  • Tanner-UNF Corporation acquired as a long-term investment $170 million of 6% bonds, dated July 1, on July 1, 2013. Company manag
    15·1 answer
  • Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the f
    7·1 answer
  • Miller Corporation is considering replacing a machine. The replacement will reduce operating expenses (that is, increase earning
    15·2 answers
  • The parts of an organization's infrastructure, human resources, technology, and procurement that make the delivery of the firm's
    6·1 answer
  • At the beginning of the year, Rangle Company expected to incur $54,000 of overhead costs in producing 6,000 units of product. Th
    6·1 answer
  • The sales volume variance is the difference between the: A. static budget (based on planned volume) and actual revenue or cost.
    8·1 answer
  • At the beginning of January of the current year, Thomas Law Center's ledger reflected a normal balance of $52,000 for
    10·1 answer
  • What three variables determine how much interest a person could earn from a savings account?
    9·1 answer
  • Specify which fundamental security design principle applies to the control recommendations?
    5·1 answer
  • What penetration model should be used when a company's management team does not wish to disclose that penetration testing is bei
    8·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!