1. TMS is currently trading at $50 per share. An executive at TMS has told...
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1. TMS is currently trading at $50 per share. An executive at TMS has told you that if the companys recently introduced new products are well received the stock will increase to $60 and if they are not well received the stock price will drop to $42 in 6 months. The current six-month interest rate is 6%. You wish to calculate C (50, .5, 50) using BOPM.
a) Find u and d
b) Find Cu and Cd
c) Calculate C (50, .5, 50)
d) Find the hedge ratio
e) Describe a risk-free portfolio that can be composed using the hedge ratio
f) Show that the portfolio is in fact risk free
g) If the actual market price of this option was $4, what strategy would you employ and what would be your rate of return?
h) Repeat part g if the market price of the option was $7
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