Ask Financial Management Expert

You are an arbitrageur looking for opportunities to capitalise on mispriced securities. You notice that the BHP put option, expiring on the 26th November 2010, with an exercise price of $46 may be mispriced. You calculated the historical volatility is 21.27%.Today's date is the 1st of October. The current stock price for BHP is $40.74.

a) Demonstrate why you believe the option is mispriced and develop a strategy to take advantage of the mispricing, assume you are correct with your estimate of historical volatility.

b) Show the risk-free portfolio that you have developed and calculate the profit that you will make if price of the option reverts to your expected theoretical value in the same day without anything else changing.

c) Soppose the mispricing of the put option is not corrected on same day. Explain what actions you would take to ensure your arbitrage portfolio remains risk free, what additional consideration need to be made?

d) You believe that there will be a series of unexpected earnings announcements in the coming weeks, while continuing to ensure your risk free position is maintained from part (a) , demonstrate how the portfolio can be altered to maximise the profit from this information.

e) On the 20 Nov, BHP will release its earning figures for the quarter ending 30th Oct 2010.Suppose the market expects the earning figure to be in line with the projections in the company's financial statement. However, you believe that due to a lack of demand from China. Commodity prices are fail, especially for resources such as nickel and iron.Would you be prefer to be long or short on the put option (X=$46) mentioned in part a? If other market participants have the same view, what effect would this have on the volatility skew?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M9494916
  • Price:- $50

Priced at Now at $50, Verified Solution

Have any Question?


Related Questions in Financial Management

Assignment problems1 on the day harry was born his parents

Assignment Problems 1. On the day Harry was born, his parents put $1600 into an investment account that promises to pay a fixed interest rate of 5 percent per year. How much money will Harry have in this account when he ...

1 activities of a company that require the spending of cash

1) Activities of a company that require the spending of cash are known as: A) Uses of cash. B) Cash on hand. C) Cash receipts. D) Sources of cash. E) Cash collections. 2) Relationships determined from a firm's financial ...

Module discussion forumto prepare for this discussion

Module : Discussion Forum To prepare for this discussion, review "Basics of Speechwriting" and "Basics of Giving a Speech" in textbook Chapter 15. Then watch this video of Apple founder and CEO Steve Jobs giving the 2005 ...

Launching a new product linefor this portfolio project

Launching a New Product Line For this Portfolio Project Option, you will act as an employee in a large company that develops and distributes men's and women's personal care products. The company has developed a new produ ...

Question 1 discuss valuing bonds and how interest rates

Question : 1) Discuss valuing bonds and how interest rates affect their value. Also consider the importance of the yield-to-maturity (YTM). 2) Discuss common stocks and preferred stocks. Also, which common stock valuatio ...

Introductionlast week you determined the root causes of the

Introduction Last week, you determined the root cause(s) of the problem you are trying to resolve for your final paper. As a reminder, the decision you are working on is the one that you selected in week two. This week, ...

You have owned and operated a successful brick-and-mortar

You have owned and operated a successful brick-and-mortar business for several years. Due to increased competition from other retailers, you have decided to expand your operations to sell your products via the Internet. ...

You will be conducting an interview with a market research

You will be conducting an interview with a market research professional or a company representative. Use the results of your research to make specific recommendations on how market research can be applied to the Marketpl ...

Question 1 what is marketing research what are the two

Question 1: What is marketing research? What are the two primary types of research? Question 2: What factors influence marketing research? Question 3: The role of statistics in business decision-making? Assignment : Sele ...

Chapter 74 for commercial banks what is meant by a managed

Chapter 7 4. For commercial banks, what is meant by a managed liability? What role do liquid assets play on the balance sheet of commercial banks? What role do money market instruments play in the asset and liability man ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As