Fin 4610 Ch 24 61-80

The common stock of Westover Foods is currently priced at $27.90 a share. One year from now, the stock price is expected to be either $25 or $30 a share. The risk-free rate of return is 4.2 percent. What is the current value of one call option on this stock if the exercise price is $27.50? A. $0 B. $1.95 C. $2.00 D. $3.80 E. $4.00

B. $1.95 Number of options needed = ($30 - $25)/(2.50 - 0) = 2 $27.90 = 2 C0 + [$25/(1 + 0.042)]; C0 = $1.95

The assets of Uptown Stores are currently worth $136,400. These assets are expected to be worth either $120,000 or $150,000 one year from now. The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year. The risk-free rate is 4.3 percent. What is the value of the equity in this firm? A. $11,920 B. $14,232 C. $19,507 D. $21,347 E. $26,408

B. $14,232 Number of options needed = ($150,000 - $120,000)/($20,000 - $0) = 1.5 $136,400 = 1.5C0 + ($120,000/(1 + 0.043); C0 = $14,232

The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months. Thus, you decide to purchase a two-month European call option on this stock with a strike price of $45 and an option price of $2.20. You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.30. What will be your net profit or loss on these option positions if the stock price is $48 on the day the options expire? Ignore trading costs and taxes. A. -$30 B. $50 C. $80 D. $270 E. $330

B. $50 Net profit = [-$2.20 + $48 - $45) x 100] + [-$0.30 x 100] = $50

You sold ten put contracts on Cross Town Bank stock at an option price per share of $0.85. The options have an exercise price of $37.50 per share. The options were exercised today when the stock price was $34 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $34? Ignore transaction costs and taxes. A. -$3,500 B. -$2,650 C. $1,800 D. $850 E. $3,500

B. -$2,650 Net loss = ($0.85 - $37.50 + $34) x 100 x 10 = -$2,650

You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $36.70 on the option expiration date? A. -$510 B. -$90 C. $90 D. $510 E. $930

B. -$90 Total loss = ($1.40 + $35 - $36.70) x 100 x 3 = -$90

You recently purchased three put option contracts on Guillepsi stock with an exercise price of $42.50. What is the total intrinsic value of these contracts if the stock is currently selling for $43.70 a share? A. -$360 B. -$120 C. $0 D. $120 E. $360

C. $0 The intrinsic value is equal to zero because the puts are out-of-the-money.

Last week, you purchased a call option on Edgewater stock with a strike price of $40. The stock price was $39.80 and the option price was $0.45 at that time. What is the intrinsic value per share if the stock is currently priced at $39.10? A. -$90 B. -$70 C. $0 D. $70 E. $90

C. $0 The intrinsic value is zero because the call is currently out-of-the-money.

You currently own a one-year call option on Rail Company, Inc., stock. The current stock price is $51.80 and the risk-free rate of return is 4.25 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option? A. $1.20 B. $2.59 C. $3.84 D. $5.13 E. $7.27

C. $3.84

You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date? A. -$2,840 B. -$1,760 C. -$1,080 D. $1,080 E. $1,760

D. $1,080 Net profit = $1.35 x 100 x 8 = $1,080. The call finished out-of-the-money.

Three weeks ago, you purchased a June $30 put option on Leeper Metals stock at an option price of $1.80. The market price of the stock three weeks ago was $30.60. Today, the stock is selling at $29.80 a share. What is the intrinsic value of your put contract? A. -$100 B. -$20 C. $0 D. $20 E. $60

D. $20 Contract intrinsic value = ($30 - $29.80) x 100 = $20

Three months ago, Central Supply stock was selling for $51.40 a share. At that time, you purchased five put options on the stock with a strike price of $50 per share and an option price of $0.60 per share. The option expires today when the value of the stock is $42.70 per share. What is your net profit or loss on this investment? Ignore trading costs and taxes. A. -$1,300 B. -$1,000 C. -$300 D. $3,350 E. $3,650

D. $3,350 Net profit = (-$0.60 - $42.70 + $50) x 100 x 5 = $3,350

This morning, you purchased a call option on Schoolhouse Supply Co. stock that expires in one year. The exercise price is $40. The current price of the stock is $43.40 and the risk-free rate of return is 3.6 percent. Assume the option will finish in the money. What is the current value of the call option? A. $0 B. $1.49 C. $3.97 D. $4.79 E. $5.46

D. $4.79 C0 = $43.40 - [$40/(1 + 0.036)] = $4.79

The Glass House has total assets currently valued at $17,200. These assets are expected to increase in value to either $18,000 or $21,000 by next year. The company has a pure discount bond outstanding with a face value of $20,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.4 percent. What is the value of the equity in this firm? A. -$3,000.00 B. -$908.00 C. $0 D. $40.73 E. $122.20

D. $40.73 Number of options needed = ($21,000 - $18,000)/($1,000 - $0) = 3 $17,200 = 3C0 + ($18,000/(1 + 0.054); C0 = $40.73

Several rumors concerning Value Rite stock are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month European $25 put and a one-month European $25 call on this stock. The call price per share is $0.60 and the put price per share is $2.10. What will be your net profit or loss on these option positions if the stock price is $18 on the day the options expire? Ignore trading costs and taxes. A. -$210 B. -$150 C. -$60 D. $430 E. $490

D. $430 Net profit = [-$0.60 x 100] + [(-$2.10 + $25 - $18) x 100] = $430

You own one call option with an exercise price of $40 on S'more Good stock. The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year. The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent. What is the current call option price if the option expires one year from now? A. $0.55 B. $0.69 C. $1.37 D. $2.43 E. $2.75

E. $2.75 Number of options needed = ($43 - $37)/(3 - 0) = 2 $41 = 2C0 + [$37/(1 + 0.0425)]; C0 = $2.75

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share. Today, the contracts expire and the stock is selling for $31.15 a share. What is your net profit or loss on this investment? Ignore trading costs and taxes. A. -$115 B. -$105 C. $20 D. $105 E. $210

E. $210 Net profit = $1.05 x 100 x 2 = $210. The put finished out of the money.

Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be worth either $23,000 or $35,000 in one year. Currently, these assets are worth $27,500. What is the current value of the bond? A. $17,746 B. $19,207 C. $20,222 D. $22,549 E. $23,048

E. $23,048 Number of options needed = ($35,000 - $23,000)/($10,000 - $0) = 1.2 $27,500 = 1.2C0 + ($23,000/(1 + 0.038); C0 = $4,451.67 Value of debt = $27,500 - $4,451.67 = $23,048

The common stock of Hazelton Refiners is selling for $72.30 a share. U.S. Treasury bills are currently yielding 4.8 percent. What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money? A. $0 B. $1.20 C. $3.00 D. $4.20 E. $5.51

E. $5.51 C0 = $72.30 - [$70/(1 + 0.048)] = $5.51

You sold one call option contract with a strike price of $55 when the option was quoted at $0.80. The option expires today when the value of the underlying stock is $53.70. Ignoring trading costs and taxes, what is the net profit or loss on this investment? A. -$250 B. -$80 C. $0 D. $50 E. $80

E. $80 Total profit = $0.80 x 100 x 1 = $80. The call finished out-of-the-money.

You own eight call option contracts on Swift Water Tours stock with a strike price of $15. When you purchased the shares the option price was $0.30 and the stock price was $15.25. What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share? A. -$83 B. -$1.08 C. $0 D. $108 E. $864

E. $864 Intrinsic value = ($16.08 - $15) x 100 x 8 = $864