Subject: Business    / Finance   


The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike

price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option

written on the stock with the same exercise price and expiration date as the call option?


The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free

rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and that expires

in 1 year. (Hint: Use daily compounding)


Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects the hotel will produce positive cash flow of $3 million a year at the end of each of the next 20 years. The project cost of capital is 13%.

(A) What is the project’s net present value?

(B) Kim expects the cash flows to be $3 million a year, but it recognizes that the cash

flows could actually be much higher or lower, depending on whether the Korean

government imposes a large hotel tax. One year from now, Kim will know whether

There is a 50% change that the tax will be imposed, in which case the yearly cash

flows will be only $2.2 million. At the same time, there is a 50% chance that the

tax will not be imposed, in which case the yearly cash flows will be $3.8 million.

Kim is deciding whether to proceed with the hotel today or to wait a year to find

out whether the tax will be imposed. If Kim waits a year, the initial investment

will remain at $20 million. Assume that all cash flows are discounted at 13%. Use

decision-tree analysis to determine whether Kim should proceed with the project

today or wait a year before deciding.