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Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum.
How high does the company's initial cash position have to be for the company to have a less than 5% chance of a negative cash position by the end of one year?
The expected stock price at the end of the next day. The standard deviation of the stock price at the end of the next day.
What is the expected instantaneous return (including interest and capital gains) to the holder of the bond?
What is the probability that the stock price will be greater than 80 in two years? (Hint: ST > 80 when In ST > In 80.)
What is the probability distribution for the rate of return (with continuous compounding) earned over a two-year period?
The time to maturity is three months, and the risk-free interest rate is 5% per annum. What is the implied volatility?
Calculate the mean and standard deviation of the distribution. Determine 95% confidence intervals.
What is the price of the option if it is a European call? What is the price of the option if it is an American call?
How high can the dividends be without the American option being worth more than the corresponding European option?
"Once we know how to value options on a stock paying a dividend yield, we know how to value options on stock indices, currencies, and futures."
What is a lower bound for the price of a six-month European call options on the index when the strike price is 290?
Derive upper and lower bounds for the price of an American put on the same stock with the same strike price and expiration date.
The price of the option is $3. What is the investor's minimum cash investment (a) if the stock price is $28 and (b) if it is $32?
The stock price is $47, the strike price is $50, and the risk-free interest rate is 6% per annum. What opportunities are there for an arbitrageur?
Explain how a strangle can be created from these two options. What is the pattern of profits from the strangle?
How can the options be used to create (a) a bull spread and (b) a bear spread? Construct a table that shows the profit and payoff for both spreads.
Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?
Identify six different strategies the investor can follow and explain the differences among them.
What type of IPO should AVG use-a traditional IPO or an online auction? Based on your analysis and findings, what would you recommend to the executives of AVG?
Construct a plot of the profit profile of the strategy that you have chosen.
The investment bankers will charge your firm $1 a share to handle the stock issue. Given these conditions, what is your firm's cost of preferred stock?
Its total interest payment for the year just ended was $45 million. What is the interest tax shield? How do you interpret this amount?
The cost of production is 80% of the selling price. What is TDD's average accounts receivable figure?
If the stock's price declines to $28 and rebounds to $44, at which time you sell your holdings, what is your profit?