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- Date Submitted: 05/15/2016 10:09 PM
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DEVRY FIN 516 Week 3 Homework

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FIN 516 Week 3 Homework

Problem 20-6 on Call Options Based on Chapter 20

You own a call option on Intuit stock with a strike price of $40. The option will expire

in exactly 3 months’ time.

a) If the stock is trading at $55 in 3 months, what will be the payoff of the call?

b) If the stock is trading at $35 in 3 months, what will be the payoff of the call?

c) Draw a payoff diagram showing the value of the call at expiration as a function of

the stock price at expiration.

Problem 20-8 on Put Options Based on Chapter 20

You own a put option on Ford stock with a strike price of $10. The option will expire

in exactly 6 months’ time.

a) If the stock is trading at $8 in 6 months, what will be the payoff of the put?

b) If the stock is trading at $23 in 6 months, what will be the payoff of the put?

c) Draw a payoff diagram showing the value of the put at expiration as a function of

the stock price at expiration.

Problem 20-11 on Return on Options Based on Chapter 20

Consider the September 2012 IBM call and put options in Problem 20-3. Ignoring any

interest you might earn over the remaining few days’ life of the options, consider the

following.

a) Compute the break-even IBM stock price for each option (i.e., the stock price at

which your total profit from buying and then exercising the option would be 0).

b) Which call option is most likely to have a return of −100%?

c) If IBM’s stock price is $216 on the expiration day, which option will have the

highest return?

Problem 21-12 on Option Valuation Using the Black Scholes Model Based on Chapter

21

Rebecca is interested in purchasing a European call on a hot new stock—Up, Inc. The

call has a strike price of $100 and expires in 90 days. The current price of Up stock is

$120, and the stock has a standard...

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