Question 1
Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What is the price of the option if it is a European put? d. Verify that put–call parity holds.

Question 2
Assume that the stock in Question 1is due to go ex-dividend in 1.5 months. The expected dividend is 50 cents. a. What is the price of the option if it is a European call? b. What is the price of the option if it is a European put? c. Use the results in the Appendix to this chapter to determine whether there are any circumstances under which the option is exercised early.

Question 3
What is the price of a European put option on a non-dividend-paying stock when the stock price is $69, the strike price is $70, the risk-free interest rate is 5% per annum, the volatility is 35% per annum, and the time to maturity is six months?

Question 4
A foreign currency is currently worth $1.50. The domestic and foreign risk-free interest rates are 5% and 9%, respectively. Calculate a lower bound for the value of a six-month call option on the currency with a strike price of $1.40 if it is (a) European and (b) American.

Question 5
Consider a stock index currently standing at 250. The dividend yield on the index is 4% per annum, and the risk-free rate is 6% per annum. A three-month European call option on the index with a strike price of 245 is currently worth $10. What is the value of a three-month put option on the index with a strike price of 245?

Question 6
An index currently stands at 696 and has a volatility of 30% per annum. The risk-free rate of interest is 7% per annum and the index provides a dividend yield of 4% per annum. Calculate the value of a...

...How can risk influence risk premium? How are risk and return related?
Risk and return are the fundamental basis upon which investors make their decision whether or not they should invest in a particular investment. How they are related and the influence between the two, is the decision making process that all investors must weigh up. This essay will show how risk can influence risk premium, outlining their...

...isolation may have little, or even no risk if held in a well-diversified portfolio.
b. The feasible, or attainable, set represents all portfolios that can be constructed from a given set of stocks. This set is only efficient for part of its combinations.
c. An efficient portfolio is that portfolio which provides the highest expected return for any degree of risk. Alternatively, the efficient portfolio is that which provides the lowest degree of...

...portfolio of rights rather than negotiating the purchase price on a film-by-film basis? Why do they propose to purchase the sequel rights at t=0 (before the first film is released) rather than at t=1?
3. Assuming a discount rate of 12% (riskfreerate of 6% and a risk premium of 6%) calculate the NPV for all the sequels. Use the expected negative costs and the expected revenues given in Table 7.
4. Using the...

...Nondiversifiable and Diversifiable Risk
c) Because Diversifiable risk can be eliminated through portfolio diversification, the more relevant risk is the Nondiversifiable risk. This kind of risk can be attributed to market forces and factors that affect ALL the firms and cannot be eliminated through portfolio diversification. In this case, the nondiversifiable risk is about 6.00%. Notice that the area...

...Risk and Return -II
PGDM/MMS- SEM-II
PROF. V. RAMACHANDRAN
FACULTY- SIESCOMS , NERUL
1
PORTFOLIOS & RISK
What is an Investment Portfolio
A group of Assets that is owned by an
Investor
Single Security is riskier than Investing in a
Portfolio.
Portfolio may contain- Equity Capital, Bonds ,
Real Estate, Savings Accounts, Bullion,
Collectibles etc.
In other words the Investor does not put all
his eggs in to one Basket.
2
Diversification...

...RISK & RETURN
TOPIC 4
Learning Objectives
1. Understand the meaning of risk and return
2. Identify risk and return relationship
3. Discuss the measurement of expected return
and standard deviation
4. Understand portfolio and diversification
5. Distinguish the different types of investment
risks
6. Measurement of return based on CAPM
WRMAS
2
RETURN DEFINED
• Return represents the total gain or loss on an investment....

...2013 6:30 PM IST (UTC +0530).
Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interestrates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds...

...is 30%. What is the return on assets of Google, Inc.(No more than two decimals in the percentage interestrate, but do not enter the % sign.)
Answer for Question 3
Question 4
(10 points) Suppose CAPM holds, and the beta of the equity of your company is 2.00. The expected market risk premium (the difference between the expected market return and the risk-freerate) is 4.5% and the...

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