Chapter 5: Q23I (page 555)
All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?
The option on the stock with a lot of firm specific risk is worth more.
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Consider a stock that will pay a dividend of D dollars in one year, which is when a futures contract matures.
Consider the following strategy: Buy the stock, short a futures contract on the stock, and borrow dollars, where is the current price of the stock.
a. What are the cash flows now and in one year? (Hint: Remember the dividend the stock will pay.)
b. Show that the equilibrium futures price must beto avoid arbitrage.
c. Call the dividend yield d = D / , and conclude that .
You are attempting to value a call option with an exercise price of \(100 and one year to expiration. The underlying stock pays no dividends, its current price is \)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%. Calculate the call option’s value using the two-state stock price model.
Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and the underlying common stock are given in the following exhibit:
Compute the bond’s:
a. Conversion value.
b. Market conversion price.
A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. Jerry Harris sells one July silver futures contract at a price of \(28 per ounce, posting a \)6,000 initial margin. If the required maintenance margin is $2,500, what is the first price per ounce at which Harris would receive a maintenance margin call?.
Return to Example 16.1. Use the binomial model to value a one-year European put option with exercise price $110 on the stock in that example. Does your solution for the put price satisfy put-call parity?
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