Exam 15: Option Valuation

Use the information for the question(s) below. The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can either go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant. -Using risk-neutral probabilities,calculate the price of a two-year put option on Kinston stock with a strike price of $9.

Risk-neutral probabilities are known by other names as well: ________.

Construct a binomial tree detailing the option information and payoffs for a call option on KD stock with a $20 strike price that expires in one year.

Luther Industries does not pay dividend and is currently trading at $25 per share.The current risk-free rate of interest is 5%.Calculate the price of a call option on Luther Industries with a strike price of $30 that expires in 75 days when N(d₁)= .639 and N(d₂)= .454.

Which of the following statements is false?

Consider the following equation: C = S × N - PV(K)× N In this equation,the term σ represents

Consider the following equation: C = S × N - PV(K)× N In this equation,the term S represents

Consider the following equation: b_E = D b_U = D b_U The term D refers to

Consider the following equation: b_E = D b_U = D b_U The term b_U refers to

Which of the following statements is correct?

Consider the following equation: B = In this equation,the term B represents

Which of the following statements is false?

Risk-neutral probabilities are also known as all of the following EXCEPT

Consider the following equation: b_option = b_S + b_B The term b_B is

Which of the following statements is false?

________ have the highest expected returns and ________ have the lowest expected returns.

Use the information for the question(s) below. The current price of KD Industries' stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:

You would like to know the beta of debt for KT Industries.The value of KT's outstanding equity is $50 million,and you have estimated its beta to be 1.62.You cannot,however,find enough market data to estimate the beta of its debt,so you decide to use the Black-Scholes formula to find an approximate value for the debt.KT has a five year zero coupon bond outstanding with a market value of $80 million.If the estimated D from the Black-Scholes model is .60,then the beta for KT's debt is closest to:

Use the information for the question(s) below. The current price of Kinston Corporation stock is $10. In each of the next two years, this stock price can either go up by $3.00 or go down by $2.00. Kinston stock pays no dividends. The one year risk-free interest rate is 5% and will remain constant. -Using the binomial pricing model,calculate the price of a two-year call option on Kinston stock with a strike price of $9.

Use the information for the question(s) below. The current price of KD Industries' stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant. -Using the binomial pricing model,the calculated price of a one-year call option on KD stock with a strike price of $20 is closest to: