BUSINESS COLLEGE

A stock is selling for $41.60. The strike price on a call, maturing in 6 months, is $45. The possible stock prices at the end of 6 months are $35.00 and $49.00. Interest rates are 5.0%. Given an underpriced option, what are the short sale proceeds in an arbitrage strategy

Answers

Answer 1
Answer:

Answer:

Possible outcome of stock price at end of 6 months (0.5 years)

Outcome 1:

Stock price = 35

Strike price = 45

Payoff call = max{ST - K,0} = max{35-45,0} = 0

Present value =

PV = 0/(1+5%)^0.5 = 0

Outcome 2:

Stock price = 49

Strike price = 45

Payoff call = max{ST - K,0} = max{49-45,0} = 4

Present value =

PV = 4/(1+5%)^0.5 = 3.903

Probability of both outcomes = 0.5

Value of call option = 0.5*0 + 0.5*3.903 = 1.95

Short sale arbitrage opportunity:

Short the stock and buy a call option. Invest the proceeds at 5% for 6 months:

Short stock = +41.6

long call = -1.95

Proceeds = 41.6 - 1.95 = 39.65

Amount after 6 months = 39.65*(1+5%)^0.5 = 40.629

Case 1:

Stock price = 35

Payoff from long call = 0

Buy the stock at market price and close the short stock position = -35

Total payoff = 40.629 - 35 = 5.629

Case 2:

Stock price = 49

Payoff from long call = 49 - 45 = 4

Buy the stock from market price and close the short stock position = -49

Total payoff = 40.629 + 4 - 49 = -4.3708

Present value of payoff from both cases = (0.5*5.629 + 0.5*(-4.3708))/(1+5%)^0.5

= 1.2581/1.0246 = 1.2277

Arbitrage payoff = 1.2277
Answer 2
Answer:

Answer:

The short sale proceeds in an arbitrage strategy is 1.2277

Explanation:

From the question given,

The  Possible outcome of stock price at end of 6 months (0.5 years)

The Outcome  is:

The Stock price = 35

The Strike price = 45

The Payoff call = max(ST - K,0) = max(35-45,0) = 0

The Present value = PV = 0/(1+5%)^0.5 = 0

The  possible Outcome 2:

The Stock price = 49

The Strike price = 45

The Payoff call = max{ST - K,0} = max{49-45,0} = 4

The Present value =

PV = 4/(1+5%)^0.5 = 3.903

Then,

The Probability of both outcomes = 0.5

Value of call option = 0.5*0 + 0.5 x 3.903 = 1.95

Therefore, the Short sale arbitrage opportunity is:

The Short the stock and buy a call option.

Invest the proceeds at 5% for 6 months:

Short stock = +41.6

long call = -1.95

Proceeds = 41.6 - 1.95 = 39.65

Amount after 6 months = 39.65*(1+5%)^0.5 = 40.629

The Case 1:

Stock price = 35

Payoff from long call = 0

Buy the stock at market price and close the short stock position = -35

The Total payoff = 40.629 - 35 = 5.629

For Case 2:

Stock price = 49

Payoff from long call = 49 - 45 = 4

Buy the stock from market price and close the short stock position = -49

Total payoff = 40.629 + 4 - 49 = -4.3708

The Present value of payoff from both cases = (0.5*5.629 + 0.5*(-4.3708))/(1+5%)^0.5

= 1.2581/1.0246 = 1.2277

Then the Arbitrage payoff = 1.2277

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Answers

Answer:

c. creating sections of the report that represent each geographic region

Explanation:

In addition to writing the total value of earnings in the report, what will have to be done is to perform a detailed breakdown of the geographical location of the earnings of each place, grouping by geographic location in case you find more than one place in the region. The different divisions must be carried out according to the power that each division represents when selling and not according to city or state.

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Machine-hours 15,000 hours 10,800 hours
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Answers

Answer:

Variable overhead efficiency variance= $14,400 favorable

Explanation:

Giving the following information:

Budgeted Actual

Production 30,000 units 24,000 units

Machine-hours 15,000 hours 10,800 hours

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Answers

Answer:

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Answers

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Answers

Answer:

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Explanation:

We need to determine the present value of the notes receivable using the pv excel function below:

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Answers

Answer:

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Explanation:

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