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Essentials Of Investments
Found in: Page 552
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

A call option on Jupiter Motors stock with an exercise price of $75 and one-year expiration is selling at $3. A put option on Jupiter stock with an exercise price of $75 and one-year expiration is selling at $2.50. If the risk-free rate is 8% and Jupiter pays no dividends, what should the stock price be?



See the step by step solution

Step by Step Solution

Step 1: Given information

Call option Selling = C = $3.00

Exercise price =X = $75

Rate = r = 8%

Put option Selling = P = $2.50

Step 2: Calculation of the value of the put

Stock price = C + X / (1+r) ^t – P

=$3 + $75/ (1+8%)^1 - $2.50


Most popular questions for Business-studies Textbooks

You are attempting to formulate an investment strategy. On the one hand, you think there is great upward potential in the stock market and would like to participate in the upward move if it materializes. However, you are not able to afford substantial stock market losses and so cannot run the risk of a stock market collapse, which you recognize is also possible. Your investment adviser suggests a protective put position:

Buy shares in a market-index stock fund and put options on those shares with three months until expiration and exercise price of $1,040. The stock index is currently at $1,200. However, your uncle suggests you instead buy a three-month call option on the index fund with exercise price $1,120 and buy three-month T-bills with face value $1,120.

a. On the same graph, draw the payoffs to each of these strategies as a function of the stock fund value in three months. (Hint: Think of the options as being on one “share” of the stock index fund, with the current price of each share of the index equal to $1,200.)

b. Which portfolio must require a greater initial outlay to establish?

( Hint: Does either portfolio provide a final payoff that is always at least as great as the payoff of the other portfolio?)

c. Suppose the market prices of the securities are as follows:

Stock Fund


T -bill (Face value $1,120


Call (Exercise price $1,120


Put (Exercise price $1040


Make a table of profits realized for each portfolio for the following values of the stock price in three months: S T = $0, $1,040, $1,120, $1,200, and $1,280. Graph the profits to each portfolio as a function of S T on a single graph.

d. Which strategy is riskier? Which should have a higher beta?


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