A call option is an option entitling. Profiting Through Options Trading
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The following are prices of options traded on Microsoft Corporation, which pays no dividends. Estimate the value of a three-month call, with a strike price of Using the inputs from the Black-Scholes model, specify how you would replicate this call.
What is the implied standard deviation in this call? Assume now that you buy a call with a strike price of 85 and sell a call with a strike price of Draw the payoff diagram on this position. Using put-call parity, estimate the value of a three-month put with a strike price of You are trying to value three-month call and put options on Merck, with a strike price of The annualized riskless interest rate is 3. Estimate the value of the call and put options, using the Black-Scholes. What effect does the expected dividend payment have on call values?
There is the possibility that the options on Merck, described active options, could be exercised early.
Use the pseudo-American call option technique to determine whether this will affect the value of the call. Why does the possibility of early exercise exist? What types of options are most likely to be exercised early? If you wanted to replicate buying this call, how much money would you reviews of the work of binary options to borrow?
If you wanted to replicate buying this call, how many shares of stock would you need to buy? There were 11 million shares outstanding.
The Rise of the Put-Call Option Agreement | Norton Rose Fulbright
The stock does not pay a dividend. Estimate the value of the warrants, ignoring dilution. Estimate the value of the warrants, allowing for dilution.
Why does dilution reduce the value of the warrants. You are trying to value a long term call option on the NYSE Composite Index, expiring in five years, with a strike price of Estimate the value of the long term call option. Estimate the value of a put option, with the same parameters.
What are the implicit assumptions you are making when you use the Black-Scholes model to value this option? Which of these assumptions are likely to be violated?
What are the consequences for your valuation?
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If you can acquire the rights to the project for the next ten years, what are the inputs for the option pricing model? The six-month T. You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits in them.
The Chilean Government is willing to grant a twenty-five year lease on the a call option is an option entitling. The average production cost is expected to be 40 cents a pound create a website and make money on it the current price per pound of copper is 85 cents.
Estimate the value of the mine using traditional capital budgeting techniques. Estimate the value of the mine based upon an option pricing model. How would you explain the difference between the two values? You have been asked to analyze the value of an oil company with substantial oil reserves. What is the value of this oil company? You are analyzing a capital budgeting project. You have done a simulation of the project cashflows and the simulation yields a variance in present value of cash inflows of 0.
What is the value of project, based upon traditional NPV? What is the value of the project as an option?
Why are the two values different? What factor or factors determine the magnitude of this difference?
Cyclops Inc, a high technology company specializing in state-of-the-art visual technology, is considering going public. While the company has no revenues or profits yet on its products, it has a ten-year patent to a product that will enable contact lens users to get no-maintenance lens that will last for years.
While the product is technically viable, it is exorbitantly expensive to manufacture and the potential market for it will be relatively small initially. Estimate the value of this company. How sensitive is this value estimate to the variance in project cash flows? What broader lessons would you draw from this analysis?
The Option to Expand and Abandon 1. NBC has the rights to televise the Winter Olympics in 2 years and is trying to estimate the value of these rights for possible sale to another network. What is the net present value of these rights, based upon current assessments? Estimate the value of these rights for sale to another network.
You are analyzing Skates Inc. The management, however, insists that it will not borrow the money because of the value of maintaining financial flexibility and they have provided you with the following information. The standard deviation in this reinvestment has been 0. Estimate the value of financial flexibility as a percent of firm value, on an annual basis.
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Based upon part a, would you recommend that Skates use its excess debt capacity? Disney is considering entering into a joint venture to build condominiums in Vail, Colorado, with a local real estate developer.
Peptonic exercises the call option to acquire the remaining shares in Lune Group Oy and the board intends to resolve on a share issue against payment in kind of approx. Today, Peptonic notified the sellers that Peptonic intends to exercise the call option. The purchase price for the shares amount to MEUR 1. MSEK On 14 MayPeptonic announced that Peptonic had entered into an agreement regarding the acquisition of a majority of the shares in Lune.
The project life is 25 years a. Would you advice Disney to enter into the joint venture? If you were advising the developer, how much would he need to generate in present value cashflows from the investment to make this a good investment?
Quality Wireless is considering making an investment in China. Under what conditions will the expansion potential have option value? Assume now that there is an option value to a call option is an option entitling that exactly offsets the negative net present value on the initial investment.
The Rise of the Put-Call Option Agreement
Reliable Machinery Inc. The initial analysis of the projects yields the following results. If the project generates much higher cash flows than anticipated, you will have the exclusive right for the next 10 years from a manufacturing license to expand operations into the rest of South East Asia. A current analysis suggests the following about the expansion opportunity.
The riskfree rate is 6. Estimate the net present value of the initial investment. Estimate the value of the expansion option. Equity in a Deeply Troubled Firm as an Option 1. Designate the following statements as true or false. Equity can be viewed as an option because equity investors have limited liability limited to their equity investment in the firm.
Equity investors will sometimes take bad projects with negative net present value because they can add to the value of the firm. Investing in a good project with positive NPV -- which is less risky than the average risk of the firm -- can negatively impact equity investors. The value of equity in a firm is an increasing function of the duration of the debt in the firm i. In a merger in which two risky firms merge and do not borrow more money, equity can become less valuable because existing debt will become less risky.
The annualized standard deviation in firm values of comparable firms is Estimate the value of the firm.
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Estimate the value of equity, using an option pricing model. Estimate the market value of debt and the appropriate interest rate on the debt.
Equity in a Deeply Troubled Firm as an Option
The correlation between stock and bond prices has been 0. Estimate the value of the equity. Estimate the implied standard deviation in firm value.
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Estimate the market value of the debt. You have been asked to analyze the value of equity in a company that has the following features. The correlation between the businesses is 0. Use the option pricing model to value equity as an option.