Finance - 2 Questoins - Needed in 2 hours
Deepak Baid
11_ps_6.docMGMT E-2000
Fall, 2013
Problem Set 6
(Due Tuesday, November 26)
1. Say that on a recent day, Wal Mart stock closed at $55.19 per share, down $.05 on the day.
Consider the following chart giving the premium as of close of trading on that day, on various options on Wal Mart stock:
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WMT (WAL MART STORES INC) 55.19 -0.05 Calls Last Sale Net Bid Ask Vol Open Int Puts Last Sale Net Bid Ask Vol Open Int
12.30 0.0 12.65 13.05 0 28 0.02 0.0 0.0 0.02 0 3194 10.15 0.0 10.15 10.60 0 224 0.02 0.0 0.0 0.02 45 14141 7.56 0.0 7.70 8.10 0 611 0.01 -0.03 0.0 0.03 42 16007 5.80 0.0 5.25 5.35 290 5611 0.02 -0.02 0.02 0.03 112 66726 3.33 -0.02 2.83 2.89 182 15093 0.08 -0.07 0.08 0.11 386 20154 0.92 -0.32 0.85 0.89 1672 34325 0.59 -0.01 0.58 0.62 2663 27823 0.20 -0.08 0.12 0.14 2220 20681 1.85 -0.41 2.33 2.38 365 10451 0.03 -0.01 0.01 0.04 114 35895 4.70 -0.15 4.70 4.80 30 6125 0.01 0.0 0.0 0.03 0 20656 7.55 0.0 7.05 7.35 0 4134 0.02 0.0 0.0 0.02 0 19428 10.43 0.0 9.40 9.85 0 2743 0.01 0.0 0.0 0.02 0 4278 10.60 0.0 11.90 12.40 0 763 0.02 0.0 0.0 0.02 0 4431 13.40 0.0 14.40 14.85 0 510 0.01 0.0 0.0 0.01 0 1057 19.50 +0.25 19.40 19.95 10 20 12.82 0.0 13.00 13.15 0 215 0.27 -0.11 0.28 0.30 219 3497 10.75 +0.45 10.65 10.80 55 41905 0.48 -0.01 0.42 0.45 140 68355 8.82 +1.02 8.40 8.55 1 4946 0.61 -0.09 0.67 0.70 179 31750 6.60 -0.20 6.30 6.40 44 68621 1.05 -0.04 1.06 1.09 210 119331 4.80 -0.15 4.45 4.55 121 3230 1.53 -0.18 1.67 1.72 78 3527 2.96 -0.34 2.88 2.94 535 49005 2.51 -0.06 2.60 2.65 306 49303 1.84 -0.12 1.68 1.73 192 4390 3.85 -0.05 3.85 4.00 80 1174 0.96 -0.04 0.88 0.92 495 67068 5.90 0.0 5.55 5.70 0 67158 0.44 -0.07 0.40 0.44 432 3725 7.60 -1.35 7.60 7.70 10 244 0.18 -0.03 0.18 0.21 64 82933 9.30 -1.33 9.85 10.00 5 17887 0.04 -0.01 0.03 0.06 150 44079 15.75 0.0 14.70 14.85 0 1319 0.01 -0.02 0.01 0.03 10 3546 20.50 0.0 19.35 19.95 0 259
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In the questions that follow, use the “Last Sale” column to answer questions which involve option pricing.
a. What was the premium on the Jan. ‘14 WMT 47.50 call, i.e., the Wal Mart call which expires in Jan. ‘14 and has a strike price of $47.50?
b. How much would an investor who wanted to buy 1 contract of this option have had to spend?
b. What is the formula for the intrinsic value of a call? What was the intrinsic value of the Dec. ‘13 WMT 50 call? Was this option “in the money” or “out of the money”? What was the time value of this option?
Formula for intrinsic value of call -
d. Was the Jan. ‘14 WMT 60 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option?
e. What was the premium on the Jan.‘14 WMT 60 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value?
f. What was the intrinsic value of the Dec.’13 WMT 50 put? Was this option in or out of the money? What was the option’s time value?
2. ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market participants, projected the following prices and probabilities for ErenCo stock on Feb. 21, 2014:
Probability 1/3 1/2 1/6
Stock Price $15 $10 $6
a. According to the EMH, what would you expect the market price of ErenCo stock to be today? Why?
b. Nancy, an investor in ErenCo, decides to buy a put option on ErenCo stock with a strike price (exercise price) of $9 which expires on the third Friday of February, 2014. What would she have to pay in today’s market for this option? In general, what determines the price an investor will have to pay for an option?
