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
Komok [63]
3 years ago
13

The current price of the common stock of Internet Enterprises is $100. Over the course of a year, the stock's price will either

increase by 100% or decrease by 50%. The stock pays no dividends. The current prices of one-period and two period zero coupon risk free bonds are $909.09 and $826.45 respectively ($1000 face value and the period here is 6 months).
A special European option has recently been created on the common stock of Internet with the following terms: On the expiration date the holder of the option has the right to sell the underlying asset for the highest stock price that occurred during the life of the option inclusive of the date on which it was issued.

What is the current value of this newly issued option on Internet Enterprises.?
Business
1 answer:
KATRIN_1 [288]3 years ago
4 0

Answer:

Current value of this newly issued option on Internet Enterprises= $25

Explanation:

Risk free rate for 6 month or period 1= (1000-909.09)/909.09=10%

Risk free rate for 1 year= (1000-826.45)/826.45=21%

Hence, risk free rate for period 2= (1+21%)/(1+10%)-1=10%

Now, Risk free rate factor for period 1 (R1)=1+10%=1.1

Risk Free rate factor for period 2 (R2)=1+10%=1.1

Upward price factor for a period(u)=(1+100%)^(1/2)=1.414

Downward price factor for a period(d)=(1-50%)^(1/2)=0.707

Probability of upward price= (R-d)/(u-d)=(1.1-0.707)/(1.414-0.707)=0.55

Probability of downward price= 1-0.55=0.45

After period 1: Upward price=100*1.414=141.4 with probability 55%

Downward price =100*0.707=70.7 with probability 45%

After period 2:

Upward Price will be =141.4*1.414=200 with probability= 55%*55%=30.25%

Downward price will be=70.7*0.707=50 with probability=45%*45%=20.25%

Mid price will be = 141.4*0.707 or 70.7*1.414=100 with probability =2*45%*55%=49.5%

Now, the highest price the stock can go is $200 with probability 30.25% and it was issued at $100

Hence, expected payoff of the option=30.25%*(200-100)=$30.25

So, current value of the newly issued option= 30.25/(1+21%)=$25

You might be interested in
Two brothers wish to open an account to trade stocks, with one brother depositing $100,000, and the other brother depositing $20
Lostsunrise [7]

Answer:

The account should be opened as a Joint account with tenancy in common. Option C.

Explanation: This type of account is one that is owned by at least two people and in which there is no rights of survivorship.

In this type of account, the members do not want their investments to go to other members of the joint account upon their death, but they specify in a will how the investment will be distributed to their beneficiaries.

Joint account with tenancy in common can hold an unequal amount of investment among members, but they still have equal rights to the account.

4 0
3 years ago
Select the correct answer. What does brand awareness of a product mean? A. the likelihood of a customer recognizing a brand amon
max2010maxim [7]
I believe the correct answer is D. Don’t hate me if I’m wrong
4 1
3 years ago
What do you do when a customer doesnt know how to put together an item they bought
BaLLatris [955]

Answer:

show them the steps to put the item together

Explanation:

6 0
3 years ago
Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run
Sliva [168]

Answer:

The correct answer is letter "C": Partnership.

Explanation:

A Partnership is an organization where two or more owners operate a business. They share the profits in proportion to their percentage partnership interest. There are two types of partnerships: <em>General Partnerships</em> (unlimited liability) and <em>Limited partnerships</em> (liability proportional to the percentage contribution of the partnership).

7 0
3 years ago
Select the correct answer.<br> How is augmented reality used in businesses?
garri49 [273]

Answer:

It uses everyday things, items like iPhones or tablets, sensors and market to find the place of physical items and then suggest where to put virtual objects.

This might be a little off since I'm not very familiar with business stuff, but I hope this helps.

7 0
3 years ago
Other questions:
  • The Peridot Company purchased machinery on January 2, 2019, for $800,000. A five-year life was estimated and no residual value w
    15·1 answer
  • Which of the following are possible outcomes of rapid population growth?
    10·2 answers
  • The mandatory leadership-training seminar had just been concluded. All of the newly promoted managers at Marc’s Music, Inc. had
    7·1 answer
  • What can you bring to our police department to make you a valuable asset to us?
    9·1 answer
  • A congress woman from a state with several ball-bearing factories explains that it is necessary to impose trade restrictions, su
    12·1 answer
  • Which of the following is an action employers must take when providing construction workers with fall protection
    6·1 answer
  • Keesha Co. borrows $275,000 cash on December 1 of the current year by signing a 180-day, 9%, $275,000 note.
    12·1 answer
  • Waterway Company has recorded the following items in its financial records. Cash in bank $51,500 Cash in plant expansion fund 11
    13·1 answer
  • Makers Corp. had additions to retained earnings for the year just ended of $248,000. The firm paid out $187,000 in cash dividend
    13·1 answer
  • Information related to plant assets, natural resources, and intangibles at the end of 2020 for Cheyenne Corp. is as follows: bui
    7·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!