For an option trading in the money, what is the likely impact on the binomial option price as the number of binomial steps is increased?
(a) The price will fall
(b) The price will increase
(c) The price will remain constant
(d) The impact can not be determined
Answer: a
Fin 402
- The spot price of the market index is $900. After 3 months the market index is priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise price of $930, is $8.00. What is the profit or loss at expiration for the long put?
- In the case of a 1 year option, the current stock price is $52 per share. If the stock price has an equal chance of ending the year at either $58 or $45, what is the ? given an interest rate of 6.0% and an exercise price of $50?
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- A stock is selling for $68.50. Interest rates are 6.0% and the returns on the stock have a standard deviation of 32.0%. What is the forecasted price of the stock using 3-month periods at Suvudu?
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- A stock is selling for $53.20. Interest rates are 6.0% and the returns on the stock have a standard deviation of 24.0%. What is the forecasted up movement in the stock over a 6-month interval?
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- A stock is selling for $18.50. The strike price on a call, maturing in 6 months, is $20. The possible stock prices at the end of 6 months are $22.50 and $15.00. Interest rates are 6.0%. How much money would you borrow to create an arbitrage on a call trading for $2.00?
- A stock is selling for $32.70. The strike price on a call, maturing in 6 months, is $35. The possible stock prices at the end of 6 months are $39.50 and $28.40. If interest rates are 6.0%, what is the option price?
- Compute ? for the following call option. The stock is selling for $23.50. The strike price is $25. The possible stock prices at the end of 6 months are $27.25 and $21.75.
- A stock is currently selling for $22.00 per share. Ignoring interest, determine the intrinsic value of a call option should there exist equally probable stock prices of $25.00 and $23.00.
- Oil is selling at a spot price of $42.00 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 7.2% per year (or 0.6% per month). What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in two month at a price of $43.00 per barrel, instead of hedging with a forward contract?
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- The spot price of corn is $2.23 per bushel. The opportunity cost of capital for an investor is 0.5% per month. If storage costs of $0.04 per bushel per month are factored in, all else being equal, what is the likely price of a 4 month forward contract?
- The 6-month futures price for oil is $21 per barrel (or 50 cents per gallon). The 6-month futures prices for gasoline and heating oil are 80 cents and 69 cents, respectively. What is the gross margin on a simple 3-2-1 crack spread?
- Forward prices for gold, in dollars per ounce, for the next five years are 305, 333, 360, 388, and 425, respectively. A mine can be opened for 3 years at a cost of $600. Annual mining costs are a constant $100 and interest rates are 5.0%. When should the mine be opened to maximize NPV?
- Nine-month gold futures are trading for $306 per ounce. The spot price is $295 per ounce. LIBOR during each of the upcoming 4 quarters is listed as 1.04%, 1.22%, 1.30%, and 1.35%, respectively. Calculate the 9-month lease rate on the futures contract.
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- Given a lease rate of 7.0% on the 24-month corn forward contract, what is the approximate potential arbitrage profit per contract?
- Which of the following terms most accurately describes the forward curve for soybeans over the next two years?
- If hog farmers expect a return of 8.0% on their investment in livestock, what is the approximate implied increase in pork belly commodity prices over the next 6 months?