chapter 15 #6 A stock is now selling at $80 per share. You buy a put to sell the stock at $75. The cost of the put is $4. The stock goes down to $72 just before the put expires. What was the profitability of buying the put? Transcribed Image Text: * (61 unread) – michael87 x

Week 7 Assignment

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A < 15. An Introduction t..
Problems
Go to 15. An Introduction to Real
Options
1. A warrant gives the holder the right to purchase a share of common stock any time in the next five years at a price of $20 per share. The
current market price of the stock is $15 per share. No dividends are anticipated, and the stock price is expected to grow to $30. The time value
of money is 12 percent.
a. What is the minimum value of the warrant?
b. What is the maximum value of the warrant?
c. What is the present value of the warrant based on a common stock price of $30 at time 5?
Put options on real assets: an
opportunity to sell
2. Assume the same facts as in problem 1 except that an investor believes that the stock price will increase to $40 per share five years from now.
What effect will this have on the three warrant values calculated in problem 1?
3. Assume the same facts as in problem 1, where an investor believes the stock price will rise to $30 five years from now. The stock pays zero
Embedded options: the value of
future uses
dividends.
a. Would an expected-present-value-maximizing investor buy the warrant at a price of $5 or the stock at a price of $15 per share?
b. Would you prefer to buy one share of common stock or three warrants?
Valuation: expected value less than
liabilities
4. Assume the same facts as in problem 3 except that a $1 dividend per share is anticipated each year.
What effect will this have on the buy-stock-versus-buy-warrant decision?
5. Suppose that the warrant in problem 4 could be purchased for $5 and that a common stock price rise to $45 is expected to occur within days.
What effect will this have on the intrinsic present value and maximum price of the warrant?
6. A stock is now selling at S80 per share. You buy a put to sell the stock at $75. The cost of the put is $4. The stock goes down to $72 just before
the put expires.
What was the profitability of buying the put?
7. Assume that an investor has $10,000 to invest. Stock can be purchased at $20 per share (500 shares can be purchased). Call options to
purchase 100 shares at a price of $25 can be purchased for $500 (options to produce 2,000 shares can be purchased).
Compare the change in the investor's wealth from buying the stock and buying the options if the stock price at the expiration of the option is:
Advantages of the option approach
Disadvantages of the option
approach
Conclusions
a. $35.
b. $24
Problems
8. Using the Black-Scholes formulation, compute the value of an option that expires in one year (T = 1) if the following facts apply.
S= $45 stock price now K = $40 exercise price
r= 1.20 (r;0.20)
02 = 0.0225 o = 0.15
Discussion question
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