FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2

FIN 534 Final Exam Part 1 & 2




PART 1

Question 1

The current price of a stock is $22, and at the end of one year its price will be either $27 or

$17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on

the stock, with an exercise price of $22, is available. Based on the binomial model, what is

the option's value? (Hint: Use daily compounding.)

$2.43

$2.70

$2.99

$3.29

$3.62

Payoff range: 27 – 17 = 10

Payoff range option: If stock is high: 27 – 22 = 5

If stock is low: 17 – 22 = -5 or zero since its negative number.

Option range is 5 – 0 = 5Therefore,$8.50 / (1+ (0.06/365))365=8.005The option price is: V =

0.50($22) – 8.01= $2.99

Question 2

Suppose you believe that Florio Company's stock price is going to decline from its current

level of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put

option giving you the right to sell 1 share at a price of $85 per share. If you bought this option

for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit

be?