MINISTRY OF EDUCATION AND TRAINING HO CHI MINH

CITY UNIVERSITY OF ECONOMICS

FACULTY OF FINANCE

GROUP ASSIGNMENT

SUBJECT: ADVANCED CORPORATE FINANCE

End - Chapter Exercise: 22

Options and Corporate Finance
Instructor : Assoc. Prof Tran Thi Hai Ly

Student : Group 5

Academic year : K49

Class : FNP004
 GROUP MEMBER LIST

Ordinal Student’s Full Name Student ID Position

Number

1 Trần Đình Đỗ Quyên 31231023856 Member

2 Tô Châu Hoàng Châu 31231024076 Member

3 Nguyễn Nhật Xuân Mai 31231024083 Member

4 Bùi Anh Kiệt 31231024271 Member

5 Hồ Thị Kim Nhi 31231024520 Team leader

6 Phạm Thị Yến Nhi 31231024627 Member

7 Trần Quách Hồng Nguyên 31231024933 Member

Ex 1: T-bills currently yield 3.4 percent. Stock in Danotos Manufacturing is currently
selling for $74 per share. There is no possibility that the stock will be worth less than $71
per share in one year.
a. What is the value of a call option with a $70 exercise price? What is the intrinsic value?
b. What is the value of a call option with a $60 exercise price? What is the intrinsic value?
c. What is the value of a put option with a $70 exercise price? What is the intrinsic value?

Answer:
a.
70
The value of a call option = Stock price − Present value of exercise price =74- =
1+ .,034
6.30
Intrinsic Value of Call=max(S−X,0) = max(74-70,0) = 4
b.
60
The value of a call option = Stock price − Present value of exercise price =74- =
1+ 0.034
15.97
Intrinsic Value of Call=max(S−X,0) = max(74-60,0) = 14
c.
The value of a put option =Stock price − Present value of exercise price = 0
Intrinsic Value of Call=max(S−X,0) = max(70-74,0) = 0
Ex 2: Use the option quote information shown here to answer the questions that follow.
The stock is currently selling for $83.

a. Are the call options in the money? What is the intrinsic value of an RWJ [Link]
option?
b. Are the put options in the money? What is the intrinsic value of an RWJ [Link]
option?
c. Two of the options are clearly mispriced. Which ones? At a minimum, what should the
mispriced options sell for? Explain how you could profit from the mispricing in each case.

Answer:
a.
A call option is considered "in the money" if: S>X <=> 83>80 (current stock price>option
strike price)
=> All call options in the table are "in the money".
The intrinsic value of an RWJ [Link] option= max(83-80,0)= 3
b.
A put option is considered "in the money" if: S<X
Here, the current stock price S=83S = 83S=83 is greater than the strike price X=80X = 80X=80,
so all put options in the table are "out of the money".
The formula for calculating the intrinsic value of a put option is:
Intrinsic Value = max(X-S,0)= max(80-83,0)= 0
c.
The March call option is mispriced because its market price ($2.80) is lower than its intrinsic
value ($3.00).
The October put option is mispriced because it trades at $3.65, while the July put is priced at
$3.90, even though October has a longer expiration period.
Minimum Fair Value of These Options:
The March call option should be priced at least equal to its intrinsic value, $3.
The October put option should be priced higher than the July put option due to its longer time
to expiration.
How to Profit from the Mispricing:
For the March call option:
Buy the call option at $2.80.
Immediately exercise the option to buy the stock at $80.
Sell the stock on the market for $83 → Instant profit of $0.20 per share.
For the October put option:
Sell the July put for $3.90.
Buy the October put for $3.65.
This results in an immediate risk-free cash inflow of $0.25 per share.
Since the October put should be worth more due to its longer time to expiration, the market will
likely correct this mispricing, allowing for further profit.
=>Conclusion: The two mispriced options are the March call option and the October put option.
Investors can exploit these mispricings through arbitrage strategies, ensuring a risk-free profit
from the price discrepancies.
Ex 3: Use the option quote information shown here to answer the ques-tions that follow.
The stock is currently selling for $114.
a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay,
ignoring commissions?
b. In part (a), suppose that Macrosoft stock is selling for $140 per share on the expira-tion
date. How much is your options investment worth? What if the terminal stock price is
$125? Explain.
c. Suppose you buy 10 contracts of the August 110 put option. What is your maximum
gain? On the expiration date, Macrosoft is selling for $104 per share. How much is your
options investment worth? What is your net gain?
d. In part (c), suppose you sell 10 of the August 110 put contracts. What is your net gain
or loss if Macrosoft is selling for $103 at expiration? For $132? What is the break-even
price—that is, the terminal stock price that results in a zero profit?
Answer:
a.
Total cost=10×100×7.60=7,600
b.
If stock price = $140:
Intrinsic Value = max(140 − 110, 0) = 30
Payoff = (140−110)×10×100=30,000
If stock price = $125:
Intrinsic Value = max(125-110,0)= 15
Payoff = (125−110)×10×100=15,000
c.
Strike Price: $110
Put Option Price: $4.70
Total cost of buying 10 contracts = 10×100×4.70= 4,700
Maximum profit (if stock price = $0):
Intrinsic value = max(110-0,0) = 110
Total investment value = 10×100×110= 110,000
Net profit = 110,000−4,700=105,300
If stock price = $104:
Intrinsic value = max(110-104,0) = 6
Total investment value = 10×100×6=6,000
Net profit = 6,000−4,700=1,300
d.
If stock price = $103:
Intrinsic value = max(110-103,0) = 7
Total amount seller must pay = 10 × 100 × 7 = 7,000
Initial premium received =$4,700
Net loss= 4,700 − 7,000 = −2,300
If stock price = $132:
Intrinsic value = 0 (since the stock price is above the strike price of $110)
Profit = Initial premium received: $4,700
Break-even Price: Break-even occurs when the loss from repurchasing the put option equals the
premium received.
110 − X = 4.70
=> X = 110 − 4.70 = 105.30
So, at $105.30, the seller neither gains nor loses money.
Ex 4: The price of Ervin Corp. stock will be either $63 or $77 at the end of the year. Call
options are available with one year to expiration. T-bills currently yield 4 percent.
a. Suppose the current price of the stock is $68. What is the value of the call option if
the exercise price is $60 per share?
b. Suppose the exercise price is $70 in part (a). What is the value of the call option
now?
Answer
Curent stock price: S0 =$68
Upward stock price: sup = $77
Downward stock price: Sdown=$63
Risk-free interest rate: r=4%
Time to expiration: 1 year
The formula for the risk-neutral probability p is:
(1+r )S 0 − S down (1+ 4 %) x 68 − 63
p= = = 0.5514
S up − S down 77 −63

The probability of a downward move is: 1−p =0.4486

(a) When Exercise Price X=60:

C up=max(77− 60 , 0)=17

C down=max (63 −60 , 0)=3

p C up+(1− p)C 0.5514 x 17 +(0.4486) x 3

C 0= down
= =10.31
1+ r 1+0.04

(b) When Exercise Price X=70:

p C up+(1− p)C
C 0= down

1+ r

C up=max(77− 70 , 0)=7

C down=max (63 −70 , 0)=0

0.5514 x 7 +0.4486 x 0
C 0= =3.71
1+0.04

Ex 7: A put option that expires in six months with an exercise price of $65 sells for $5.12.
The stock is currently priced at $66 and the risk-free rate is 3.6 percent per year,
compounded continuously. What is the price of a call option with the same exercise price?
Answer
We will use the Put-Call Parity formula: C-P= S0 − X e − rt
Where:
C=? (Call option price)
P=5.12 (Put option price)
X=$65 (Exercise price)
S0 = $66
r=3.6%=0.036
t=6/12=0.5 (Time to expiration)
=> C-5.12=66-65xe −0.036 X 0.5
=> C=7.28
Ex 8: A put option and a call option with an exercise price of $105 and three months to
expiration sell for $4.89 and $5.32, respectively. If the risk-free rate is 4.8 percent per
year, compounded continuously, what is the current stock price?
Answer:
We will use the Put-Call Parity formula: C-P= S0 − X e − rt
Where:
C=5.32 (Call option price)
P=4.89 (Put option price)
X=105 (Exercise price)
r=4.8%=0.048
t=3/12=0.25 (Time to expiration)
We have: C-P= S0 − X e − rt
=> 5.32-4.89= S0 - 105xe −0.048 x0.25
=> S0 =104.18