Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. If the hedge ratio is 0.620 then a hedge portfolio consists of: Short position in 1,000 calls and a long position in 620 shares

1. If the hedge ratio is 0.620 then a hedge portfolio consists of:

Short position in 1,000 calls and a long position in 620 shares

Short position in 1,000 calls and a short position in 620 shares

Short position in 620 calls and a long position in 620 shares

Short position in 620 calls and a long position in 1,000 shares

Short position in 620 calls and a short position in 620 shares

2. Consider a 1-period BOPM where a period is 1 year. The current stock price is 40. The stock could up by 20% (u=1.2) or down by 10% (0.9) and the risk-free rate is 8%. The strike price of a call option is 45. What is the hedge ratio?

3. Consider a 1-period BOPM where a period is 1 year. The current stock price is 40. The stock could up by 20% (u=1.2) or down by 10% (d=.9) and the risk-free rate is 8%. The strike price of a call option is 45. What is the fair price of this call option?

4. The current stock price is $80. The stock pays a dividend of $2 every quarter. The risk-free rate is 4%. Over each of the next three-month periods the stock could go up by 10% (u=1.1) or down by 5% (d=.95). The option expires after the second dividend is paid. What is the value of p? (Round to 2 decimal places)

5. The current stock price is $80. The stock pays a dividend of $2 every quarter. The risk-free rate is 4%. Over each of the next three-month periods the stock could go up by 10% (u=1.1) or down by 5% (d=.95). The option expires in six months after the second dividend is paid. What is the price of the stock at maturity if stock goes up in the first period and up in the second period? (Round to 2 decimal places)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cornerstones Of Financial Accounting

Authors: Jay Rich, Jeff Jones, Maryanne Mowen, Don Hansen

2nd Edition

0538473452, 9780538473453

More Books

Students also viewed these Finance questions