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What price risk is an investor exposed to if he owns a share of stock and has purchased

What price risk is an investor exposed to if he owns a share of stock and has purchased a put option on the stock? 

99. Assume that the current stock price is $50 per share, that call options can be purchased with an exercise price of $60 per share, that bank loans can be obtained for a 10% nominal rate, and that at expiration of the option in 3 months, the stock will either be valued at $30 or $70. Show that it is possible to replicate the stock payoff by borrowing and buying a call option. 

100. Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share. Calculate both the bond value and conversion value. 

101. Assume that a share of stock is currently selling for $80, that a call option can be purchased for an $8 premium and an exercise price of $80, and that a put option can be purchased for a $4 premium and an exercise price of $80. If the investor buys one share, one call, and one put option, what type of price movements will be desirable? Illustrate the investor's potential profits. 

Jan 09 2020 View more View Less

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