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Almost all option pricing models are based on the concept of a riskless hedge. Investors can create a riskless hedge by purchasing shares of stock
Almost all option pricing models are based on the concept of a riskless hedge. Investors can create a riskless hedge by purchasing shares of stock and simultaneously selling a call option on the stock. Suppose Sally Rubber Co. stock is currently selling for $70.00 per share. Options exist that permit the holder to buy one share at an exercise price of $65.00. These options will expire at the end of one year. When the options expire, Sally Rubber Co.'s stock will either be selling for $85.00 or $45.00. What is the range of Sally Rubber Co.'s ending stock prices? $50.00 $30.00 $40.00 $45.00 What is the range of Sally Rubber Co.'s ending option values? $15.00 $30.00 $20.00 $40.00 To construct a riskless portfolio, an investor will need to equalize these ranges. If the investor is planning on selling one option, how many shares of stock should he or she buy to equalize these ranges? Assume that for this problem you can buy less than one share of stock. 0.40 0.30 0.45 0.50
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