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College Assignment: Financial Derivatives and Hedging Strategies - Document preview page 1

College Assignment: Financial Derivatives and Hedging Strategies - Page 1

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College Assignment: Financial Derivatives and Hedging Strategies

An assignment on financial derivatives, including their uses in hedging strategies in finance.

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College Assignment: Financial Derivatives and Hedging Strategies - Page 1 preview imageCollege Assignment: Financial Derivatives and Hedging Strategies1.OptionsA call option on Bedrock Boulders stock has a market price of $9. The stock sells for $30 a share, andthe option has an exercise price of $25 a share.a. What is the exercise value of the call option? Round your answer to two decimal places.$________b. What is the premium on the option? Round your answer to two decimal places.$________Call option’s market price = $9; Stock’s price = $30; Option exercise price = $25.a.Exercise value= Current stock price–Exercise price= $30–$25= $5.00.b.Premium value= Option’s market price–Exercise value= $9–$5= $4.00.2.OptionsThe exercise price on one of Flanagan Company's options is $13, its exercise value is $22 and itspremium is $5.a. What is the option's market value? Round your answer to two decimal places.$________b. What is the price of the stock? Round your answer to two decimal places.$________Option’s exercise price = $13; Exercise value = $22; Premium value = $5; V = ? P0= ?Premium= Market price of option–Exercise value$5= V–$22V= $27.
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College Assignment: Financial Derivatives and Hedging Strategies - Page 2 preview image
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College Assignment: Financial Derivatives and Hedging Strategies - Page 3 preview imageExercise value= P0–Exercise price$22= P0–$13P0= $35.3.OptionsWhich of the following events are likely to increase the market value of a call option on a common stock?An increase in the time until the option expires.A decrease in the time until the option expires.A decrease in the stock's price.A decrease in the volatility of the stock price.A decrease in the risk-free rate.Therefore, conditions a will cause an option’s market value to increase4.Black-Scholes modelAssume you have been given the following information on Purcell Industries:Current stock price = $16Exercise price of option = $10Time to maturity of option = 6 monthsRisk-free rate = 8%Variance of stock price = 0.14d1= 2.05992d2= 1.79534N(d1) = 0.98N(d2) = 0.96Using the Black-Scholes Option Pricing Model, what would be the value of the option? Round youranswer to two decimal places.$________P = $15; X = $16; t = 0.5; rRF= 0.08;2= 0.14; d1= 2.055992; d2= 1.79534; N(d1) = 0.98;N(d2) = 0.96; V = ?Using the Black-Scholes Option Pricing Model, you calculate the option’s value as:V= P[N(d1)]–Xetr-RF[N(d2)]
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