FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2 (FIN534FINAL12)
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FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2
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FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2 (FIN534FINAL12)
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13F Slc Cde
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/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/FIN 534 Final Exam Part 1 & 2
fin 534 final exam part 1 amp 2fin 534 final exam part 1 amp 2fin 534 final exam part 1 amp 2
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13F Slc Cde
FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2/FIN 534 Final Exam Part 1 & 2 (FIN534FINAL12)
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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?
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