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.