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Exam 21: Option Valuation

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Use the information for the question(s) below. The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can wither go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant. -Using the binomial pricing model,calculate the price of a two-year put option on Kinston stock with a strike price of $9.

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(Essay)
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Question 1
Correct Answer:
Verified

This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 Up branch
D = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = 0
B = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = 0
C = SD + B = $13(0)+ (0)= $0
Down Branch
D = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = -0.6
B = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = 6.285714
C = SD + B = $8(-0.6)+ (6.285714)= $1.49
Value at year 0
D = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = -0.298
B = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = This problem requires a two period binomial tree.The solution will start by solving the value of the call option for the up and down branches as of year 1 and then solve for the final value of the option at year 0. Up branch D = = 0 B = = = 0 C = SD + B = $13(0)+ (0)= $0 Down Branch D = = -0.6 B = = = 6.285714 C = SD + B = $8(-0.6)+ (6.285714)= $1.49 Value at year 0 D = = -0.298 B = = = 3.874 C = SD + B = $10(-0.298)+ 3.874 = $0.89 = 3.874
C = SD + B = $10(-0.298)+ 3.874 = $0.89

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

Free
(Multiple Choice)
4.8/5
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Question 2
Correct Answer:
Verified

B

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

Free
(Multiple Choice)
4.8/5
(33)
Question 3
Correct Answer:
Verified

A

Consider the following equation: Consider the following equation: In this equation,the term σ represents In this equation,the term σ represents

(Multiple Choice)
4.9/5
(35)
Question 4

Use the information for the question(s) below. The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can wither go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant. -Using risk neutral probabilities,calculate the price of a two-year put option on Kinston stock with a strike price of $9.

(Essay)
4.8/5
(39)
Question 5

Use the information for the question(s) below. The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can wither go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant. -Using risk neutral probabilities,calculate the price of a two-year call option on Kinston stock with a strike price of $9.

(Essay)
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(30)
Question 6

Risk neutral probabilities are also known as all of the following except

(Multiple Choice)
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Question 7

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using risk neutral probabilities,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

(Multiple Choice)
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Question 8

Use the following information to answer the question(s) below. (Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems.) Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share. Taggart pays no dividends. The risk-free interest rate is 4%. -The Black-Scholes Δ of a one-year,at-the-money call option on Taggart stock is closest to:

(Multiple Choice)
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Question 9

Consider the following equation: B = Consider the following equation: B = In this equation,the term B,represents In this equation,the term B,represents

(Multiple Choice)
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Question 10

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -The risk neutral probability of an up state for KD Industries is closest to:

(Multiple Choice)
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Question 11

Consider the following equation: Consider the following equation: The term Is The term Consider the following equation: The term Is Is

(Multiple Choice)
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Question 12

Use the following information to answer the question(s) below. (Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems.) Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share. Taggart pays no dividends. The risk-free interest rate is 4%. -Assuming the beta on Taggart stock is 0.75,then the beta for a one-year,at-the-money put option on Taggart stock is closest to:

(Multiple Choice)
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Question 13

Use the following information to answer the question(s) below. (Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems.) Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share. Taggart pays no dividends. The risk-free interest rate is 4%. -The Black-Scholes value of a one-year,at-the-money put option on Taggart stock is closest to:

(Multiple Choice)
4.9/5
(35)
Question 14

Use the following information to answer the question(s) below. (Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems.) Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share. Taggart pays no dividends. The risk-free interest rate is 4%. -Consider a one-year,at-the-money call option on Taggart stock.The effect on the price of this call option of an increase in the volatility from 25% to 40% is closest to:

(Multiple Choice)
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Question 15

Consider the following equation: Consider the following equation: In this equation,the term T represents In this equation,the term T represents

(Multiple Choice)
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Question 16

Which of the following statements is false?

(Multiple Choice)
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Question 17

Use the following information to answer the question(s) below. (Please use a copy of the Cumulative Probabilities for the standard normal distribution for these problems.) Taggart Transcontinental's stock has a volatility of 25% and a current stock price of $40 per share. Taggart pays no dividends. The risk-free interest rate is 4%. -The Black-Scholes Δ of a one-year,at-the-money put option on Taggart stock is closest to:

(Multiple Choice)
4.9/5
(36)
Question 18

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using the binomial pricing model,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to:

(Multiple Choice)
4.8/5
(43)
Question 19

Use the information for the question(s) below. The current price of KD Industries stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Construct a binomial tree detailing the option information and payoffs for a call option with a $20 strike price that expires in one year.

(Essay)
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(43)
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