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DEVRY FIN 516 Week 3 Homework
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DEVRY FIN 516 Week 3 Homework
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FIN 516 Week 3 Homework
Problem 206 on Call Options Based on Chapter 20
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Problem 208 on Put Options Based on Chapter 20
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.
a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.
Problem 2011 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 203. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.
a) Compute the breakeven IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).
b) Which call option is most likely to have a return of −100%?
c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?
Problem 2112 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The riskfree interest rate is 6.18% per year.
a) Using the BlackScholes formula, compute the price of the call.
b) Use putcall parity to compute the price of the put with the same strike and expiration date.
Problem 3014 on Swaps Based on Chapter 30
Your firm needs to raise $100 million in funds. You can borrow shortterm at a spread of 1% over LIBOR. Alternatively, you can issue 10year, fixedrate bonds at a spread of 2.50% over 10year treasuries, which currently yield 7.60%. Current 10year interest rate swaps are quoted at LIBOR versus the 8% fixed rate.
Management believes that the firm is currently underrated and that its credit rating is likely to improve in the next year or two. Nevertheless, the managers are not comfortable with the interest rate risk associated with using shortterm debt.
Problem 306 on Futures Contract Based on Chapter 30
Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60 per barrel. Suppose futures prices change each day as follows.
Check this A+ tutorial guideline at
www.assignmentcloud.com/fin516new/fin516week3homework
For more classes visit
www.assignmentcloud.com
FIN 516 Week 3 Homework
Problem 206 on Call Options Based on Chapter 20
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time.
a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?
b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?
c) Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.
Problem 208 on Put Options Based on Chapter 20
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly 6 months’ time.
a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?
b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?
c) Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration.
Problem 2011 on Return on Options Based on Chapter 20
Consider the September 2012 IBM call and put options in Problem 203. Ignoring any interest you might earn over the remaining few days’ life of the options, consider the following.
a) Compute the breakeven IBM stock price for each option (i.e., the stock price at which your total profit from buying and then exercising the option would be 0).
b) Which call option is most likely to have a return of −100%?
c) If IBM’s stock price is $216 on the expiration day, which option will have the highest return?
Problem 2112 on Option Valuation Using the Black Scholes Model Based on Chapter 21
Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The riskfree interest rate is 6.18% per year.
a) Using the BlackScholes formula, compute the price of the call.
b) Use putcall parity to compute the price of the put with the same strike and expiration date.
Problem 3014 on Swaps Based on Chapter 30
Your firm needs to raise $100 million in funds. You can borrow shortterm at a spread of 1% over LIBOR. Alternatively, you can issue 10year, fixedrate bonds at a spread of 2.50% over 10year treasuries, which currently yield 7.60%. Current 10year interest rate swaps are quoted at LIBOR versus the 8% fixed rate.
Management believes that the firm is currently underrated and that its credit rating is likely to improve in the next year or two. Nevertheless, the managers are not comfortable with the interest rate risk associated with using shortterm debt.
Problem 306 on Futures Contract Based on Chapter 30
Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60 per barrel. Suppose futures prices change each day as follows.
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