a) GE stock is currently trading for $50 per share. A one-year European call opt

Question

a) GE stock is currently trading for $50 per share. A one-year European call option with a
strike price of $55 is currently trading for $8.00. If the one-year risk-free interest rate
is 5 %, what is the value of a one-year European put option on GE with a strike price of
$55? (5 marks)
b) Explain the put-call parity concept. (5 marks)
c) Firm A has 3,000 shares of stock outstanding, each with a market price of $30 per
share. Firm B has 2,500 shares of stock outstanding, each with a market value of $25
per share. Firm A can acquire Firm B in either cash or stock. Both firms are totally
financed with equity. Total synergy from the acquisition is $10,000. What is the NPV of
acquiring Firm B with cash of $28 per share? (5 marks)
d) Discuss the empirical evidence on the success of mergers and acquisitions. Do the
bidding firms need to take care in approaching a merger deal? Explain. (5 marks)

Explanation / Answer

Answer: A.In case of multiple unrelated questions allowed to answer related parts only. please put the last two questions separately to get answered

Put - call parity equation is this

C(T) - P(T) = S(T) -K . B(t,T)

C(T)= value of the call option

P(T) = value of the put option

S(T) = Spot price = $50

K = Strike price = $55

B(t,T) = PV of zero coupn bond formula to calculte this is e^(-r(T-t))

So C(T) is given to be $8

P(T) we have to find

8 - P = 50 - 55 e ^ (-0.05(1))

Solving this

p = 8-50 +55 e^(-0.05)

p = -42 + 55 e^(-0.05)

p = -42 + 55* 0.9512

p = 10.32 approx is the put price

AnswerB. Put call pairty defines the relationship between european put option and european call option with the same underlying asset, should have same strike price and expiration date also.

The main essence of put call parity is that if you hold short european put and long eurpean call option simulataneously of the same class, the return will be similar to holding a forward contract of the same asset class, duration and forward price equal to call options strike price

C(T) - P(T) = S(T) -K . B(t,T)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.