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 deviation of 40 % per year . The risk-free interest rate is 6.18 % per year .
a ) Using the Black-Scholes formula , compute the price of the call .
b ) Use put-call parity to compute the price of the put with the same strike and expiration date .
Problem 30-14 on Swaps Based on Chapter 30
Your firm needs to raise $ 100 million in funds . You can borrow short-term at a spread of 1 % over LIBOR . Alternatively , you can issue 10-year , fixed-rate bonds at a spread of 2.50 % over 10-year treasuries , which currently yield 7.60 %. Current 10- year interest rate swaps are quoted at LIBOR versus the 8 % fixed rate .
Management believes that the firm is currently underrated and that its credit rating is likely to improve in the next year or two . Nevertheless , the managers are not comfortable with the interest rate risk associated with using short-term debt .