Suppose that the production facilities of a corporation are damaged as a result of an earthquake. The corporation estimates that repairing the facilities will cost the company £1 million annually for 3 years. What is the impact of this earthquake on the stock price of the corporation, if the corporation is 100% equity financed, its equity cost of capital is 5%, and it has 1 million shares outstanding? Hearing the news about the earthquake could you make a profit?

 

Suppose that you consider purchasing a European call option on a single share of Wal-Mart stock. Wal-Mart's current share price is So-$30. The option has a strike price of K=$50 and expires next week. Do you think you would pay a high or a low price for this option? Would you pay more or less if (a) the share price was higher, say So-$100? (b) the strike price was lower, say K=$30? (c) the stock price volatility was higher? Now, explain how the price of a put option that has the identical features with the call option would change if: (d) the share price was higher, say So-$100? (e) the strike price was lower, say K=$30? (f) the stock price volatility was higher