Question
PLEASE SHOW ALL YOUR WORK including each and every step of every calculation involved in this question! You own one share of Wesson Industries. Tomorrow,
PLEASE SHOW ALL YOUR WORK including each and every step of every calculation involved in this question!
You own one share of Wesson Industries. Tomorrow, the probability of your stock being certain prices is as follows:
stock price probability
71 12%
72 13%
73 14%
74 15%
75 16%
76 17%
77 13%
The interest rate is 0. Calls at 75 expiring tomorrow sell for 0.43. Puts at 73 expiring tomorrow sell for 0.37.
A: (6 points) You want to hedge your position to reduce your risk. What combination of puts and calls will you buy or sell?
B: (14 points) Given your answer in A, what is the standard deviation of your position? What is the percentage standard deviation (the standard deviation over your expected value) of your position? (Don't forget to take account of the monies you gained or lost buying or selling buts and calls.)
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