Question
21-19.Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.58 per share. In one year, the share price is equally likely
21-19.Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.58 per share. In one year, the share price is equally likely to be $28 or $20. The risk-free interest rate is 5%.
a.What is the expected return on Harbin stock?
b.What is the risk-neutral probability that Harbin's stock price will increase?
a.E[r] = 0.5(28 + 20)/23.58 - 1 = 1.78%
b.
21-20.Using the information on Harbin Manufacturing in Problem 19, but assuming a risk neutral probability of a price rise of 0.25, answer the following:
a.Using the risk neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike price of $25?
b.What is the expected return of the call option?
c.Using the risk neutral probabilities, what is the value of a one-year put option on Harbin stock with a strike price of $25?
d.What is the expected return of the put option?
a.25% (30 - 25)/1.05 = $1.19
b.50% (5)/1.19 - 1 = 110%
c.75% (25 - 18)/1.05 = $5
d.50% (7)/5 - 1 = -30%
why in 21-19 a expected return is calculated in this way what is the formula because risk neutral probability forfula not like this.
in 21-20 questions do not understand four questions. Can any tutor explain in details
Thank you in advance
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