Chapter 22 Rewritten Questions
Question 1

1. a. The value of the call is the stock price minus the present value of the exercise price, so:

C0 = $70 – [$60/1.055] = $13.13

The intrinsic value is the amount by which the stock price exceeds the exercise price of the call, so the intrinsic value is $10.

b. The value of the call is the stock price minus the present value of the exercise price, so:

C0 = $70 – [$50/1.055] = $22.61

The intrinsic value is the amount by which the stock price exceeds the exercise price of the call, so the intrinsic value is $20.

c. The value of the put option is $0 since there is no possibility that the put will finish in the money. The intrinsic value is also $0.

Question 2

4. a. The value of the call is the stock price minus the present value of the exercise price, so:

C0 = $70 – 60/1.06 C0 = $13.40

b. Using the equation presented in the text to prevent arbitrage, we find the value of the call is:

$70 = [($85 – 65)/($85 – 80)]C0 + $65/1.06 C0 = $2.17

Question 3

7. Using put-call parity and solving for the call price we get:

$57 + $4.89 = $60e–(.036)(.5) + C C = $2.96

Question 4

16. The stock price can either increase 15 percent, or decrease 15 percent. The stock price at expiration will either be: Stock price increase = $54(1 + .15) = $62.10 Stock price decrease = $54(1 – .15) = $45.90 The payoff in either state will be the maximum stock price minus the exercise price, or zero, which is: Payoff if stock price increases = Max[$62.10 – 50, 0] = $12.10 Payoff if stock price decreases = Max[$45.90 – 50, 0] = $0 To get a 15 percent return, we can use the following expression to determine the risk-neutral probability of a rise in the price of the stock: Risk-free rate =