E=2
a) Fosho Muzik Ltd pays dividends at the end of each quarter that are constantly growing by 2% p.a. compounded quarterly. If the dividend paid exactly three months ago was $(1 + E), and another dividend has just been paid yesterday, what is the annual effective required rate of return on FoSho Muzik Ltd shares if the share price today is $162? (8 marks) b) The ordinary shares of Chonkz Ltd are selling for $45. A 48-week put option written on Chonkz stock is selling for $3.50. The put's exercise price is $51. The risk-free rate is 8% p.a. compounded semi-annually. i. Suppose that calls on Chonkz stock are not traded (on either an exchange or the OTC market). Using the above information, explain how to create a portfolio that has an identical payoff as a call option with 48 weeks to expiry and an exercise price $51. (10 marks) ii. Suppose that calls are traded. What should a 48-week call option with an exercise price of $51 sell for? Be sure to show your calculations. (3 marks) Now assume it is 20 weeks before expiration and Chonkz Ltd share options are American in nature. How can a holder of a Chonkz put option traded on the ASX liquidate their position prior to expiration? In describing the two ways the holder can liquidate, outline the overall profit that can be obtained for each way, assuming the market price for Chonkz with 20 weeks to expiry is $53, the put premium is now $2.10 and each contract is written on 50 shares. In your answer, define the two ways in words, and then make sure to include all payments prior to, and including at liquidation. (8 marks) a) Fosho Muzik Ltd pays dividends at the end of each quarter that are constantly growing by 2% p.a. compounded quarterly. If the dividend paid exactly three months ago was $(1 + E), and another dividend has just been paid yesterday, what is the annual effective required rate of return on FoSho Muzik Ltd shares if the share price today is $162? (8 marks) b) The ordinary shares of Chonkz Ltd are selling for $45. A 48-week put option written on Chonkz stock is selling for $3.50. The put's exercise price is $51. The risk-free rate is 8% p.a. compounded semi-annually. i. Suppose that calls on Chonkz stock are not traded (on either an exchange or the OTC market). Using the above information, explain how to create a portfolio that has an identical payoff as a call option with 48 weeks to expiry and an exercise price $51. (10 marks) ii. Suppose that calls are traded. What should a 48-week call option with an exercise price of $51 sell for? Be sure to show your calculations. (3 marks) Now assume it is 20 weeks before expiration and Chonkz Ltd share options are American in nature. How can a holder of a Chonkz put option traded on the ASX liquidate their position prior to expiration? In describing the two ways the holder can liquidate, outline the overall profit that can be obtained for each way, assuming the market price for Chonkz with 20 weeks to expiry is $53, the put premium is now $2.10 and each contract is written on 50 shares. In your answer, define the two ways in words, and then make sure to include all payments prior to, and including at liquidation. (8 marks)
