1.Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $110 and an expiration date of August 1st.
a. What is the maximum possible price for this option?
b. What is the minimum possible price for this option?
2.You are watching the option quotes for your favorite stock, when suddenly there is a news announcement. Explain what type of news would lead to the following effects:
a. Call prices increase, and put prices fall.
b. Call prices fall, and put prices increase.
c. Both call and put prices increase.
3.Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart.
4.Consider an American put option on XAL stock with a strike price of $55 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest rate is 10%. If it is optimal to exercise this option early:
a. What is the price of a one-year American put option on XAL stock with a strike price of $60 per share?
b. What is the maximum price of a one-year American call option on XAL stock with a strike price of $55 per share?
5.The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR (monthly compounding), what is the maximum strike price where it could be possible that early exercise of the call option is optimal? (Round to the nearest dollar.)
6.Suppose the S&P 500 is at 900, and a one-year European call option with a strike price of $400 has a negative time value. If the interest rate is 5%, what can you conclude about the dividend yield of the S&P 500? (Assume all dividends are paid at the end of the year.)
7.Suppose the S&P 500 is at 900, and it will pay a dividend of $30 at the end of the year. Suppose the interest rate is 2%. If a one-year European put option has a negative time value, what is the lowest possible strike price it could have?
8.Wesley Corp. stock is trading for $25/share. Wesley has 20 million shares outstanding and a market debt-equity ratio of 0.5. Wesley’s debt is zero coupon debt with a 5-year maturity and a yield to maturity of 10%.
a. Describe Wesley’s equity as a call option. What is the maturity of the call option? What is the market value of the asset underlying this call option? What is the strike price of this call option?
b. Describe Wesley’s debt using a call option.
c. Describe Wesley’s debt using a put option.
9.Express the position of an equity holder in terms of put options.
10.Use the option data in Figure 20.10 to determine the rate Google would pay if it issued $128 billion in zero-coupon debt due in January 2011. Suppose Google currently has 320 million shares outstanding, implying a market value of $135.1 billion. (Assume perfect capital markets.)
11.Suppose Google were to issue $96 billion in zero-coupon senior debt, and another $32 billion in zero-coupon junior debt, both due in January 2011. Use the option data in Figure 20.10 to determine the rate Google would pay on the junior debt issue. (Assume perfect capital markets.)