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A stock's current price is $40. The exercise price on the underlying option is also $40. The appropriate risk-free rate is 4.5%. It is your
A stock's current price is $40. The exercise price on the underlying option is also $40. The appropriate risk-free rate is 4.5%. It is your belief that the stock price will move up by 15% or down by 10% prior to expiration of the option. Show all of your calculations. a. If the call option were trading in the market at $3.50, what would be an appropriate strategy? b. Compare your portfolio at time with your portfolio value at expiration if the underlying stock decreased by the expected amount. Determine the rate of return. c. Do you have an investing or borrowing situation? How do you know? d. What would the put value be under these same circumstances? A stock's current price is $40. The exercise price on the underlying option is also $40. The appropriate risk-free rate is 4.5%. It is your belief that the stock price will move up by 15% or down by 10% prior to expiration of the option. Show all of your calculations. a. If the call option were trading in the market at $3.50, what would be an appropriate strategy? b. Compare your portfolio at time with your portfolio value at expiration if the underlying stock decreased by the expected amount. Determine the rate of return. c. Do you have an investing or borrowing situation? How do you know? d. What would the put value be under these same circumstances
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