4

1. Use the following information to answer the next three questions

   The following information is provided in the context of a two period (two six month periods) binomial option pricing model. A stock currently trades at $60 per share, a call option on the stock has an exercise price of $65. The stock is equally likely to rise by 15% or fall by 15% during each six month period. The one-year risk free rate is 3%.

   Find the probability that the stock rises each period. Round intermediate steps and your final answer to four decimals.

   .4504

   .5496

   .9324

   .0676

6.25 points

QUESTION 5

1. Find the value of the American call today. Round intermediate steps and your final answer to four decimals and your final answer to two decimals.

   4.21

   7.77

   2.17

   2.83

6.25 points

QUESTION 6

1. Find the present value of a European call given the same information listed in question 4.

6.25 points

QUESTION 7

1. Use the following information to answer the nexttwo questions

   The following information is provided in the context of a two period (twothree month periods) binomial option pricing model. A stock currently trades at $40 per share, aput option on the stock has an exercise price of $39. The stock is equally likely to rise by 10% or fall by 10% during eachthree month period. The one-year risk free rate is 8%.

   Find the value of an American put. Round intermediate steps to four decimals. Round your final answer to two decimals.

   1.03

   1.19

   2.26

   1.76

6.25 points

QUESTION 8

1. Find the value ofa Europeanput. Round intermediate steps to four decimals. Round your final answer to two decimals.

   1.03

   1.19

   1.76

   2.26

6.25 points

QUESTION 9

1. Hedge ratios specify the number of puts or calls that must be written or purchased to eliminate the risk associated with changes in the value of the underlying asset.

   True

   False

6.25 points

QUESTION 10

1. The current value of XYZ Inc is 100. You expect XYZ could move by 20% in either direction over the next three months. The annual risk free rate is 2%. Find the value of a three month call on XYZ stock with an exercise price of $110. Round intermediate steps to four decimals and your final answer to two decimals. Do not enter a dollar sign when inputting your answer.

6.25 points

QUESTION 11

1. Based on the information in the previous question, an investor that owns 1000 shares of XYZ can hedge their position by buying 4000 shares worth of call options.

   True

   False

6.25 points

QUESTION 12

1. There is an inverse relationship between the value of a call option on a stock and the dividend that the stock pays.

   True

   False

6.25 points

QUESTION 13

1. An American call option on Jones Corp. that expires in 6 months sells for $15. The strike price is $50 and the underlying stock currently sells for $60. Find the time value of the option. Do not enter a dollar sign when inputting your answer.

6.25 points

QUESTION 14

1. Assume that you create a hedged portfolio consisting of a long position in stock and enough call options contracts to eliminate the price risk. The expected return of your portfolio will be zero since the variance in your returns will be zero.

   True

   False

6.25 points

QUESTION 15

1. Suppose astockcurrently sells for$80 but could go up by10 percent or down by2 percent over the next six months. A six monthAmerican put on the stock has an exercise price of $83. Find the value of the put option today if the annual risk free rate is 6%. Round intermediate steps to four decimals and your final answer to two decimals. Do not use the dollar sign when entering your response.

6.25 points

QUESTION 16

1. Suppose that the optionin thepreviousquestionwas aEuropeanput.Howwouldthischangeaffectyouranswer to thepreviousquestion?

   The Europeanputwould be worthmore than theAmericanput.

   The Europeanputwouldbeworth thesame as the Americanput.

   The Europeanputwouldbe worthless than the Americanput.

   Cannotbedetermined.