Question
The current price of share of Stock Z is $100. The binomial model for this stock suggests that the price next year will be either
The current price of share of Stock Z is $100. The binomial model for this stock suggests that the price next year will be either 50% higher or 33% lower (i.e. either $150 or $67). The annual risk-free rate is 7%. The stock does not pay dividends.
a. What is the hedge ratio for a one-year call option on Stock Z. The call option has an exercise (strike) price of $80?
b. If you have bought 1000 of the calls in part a then how many shares of Stock Z will you need to either buy or sell short to create a risk-free portfolio? Specify whether you will buy share or short shares.
c. If you have bought 1000 of the calls in part a then how many one-year put options on Stock Z, with an exercise (strike) price of $80, will you need to either buy or sell to create a risk-free portfolio?
Calculate the current value of the one-year call option on Stock Z, with an exercise (strike) price of $80.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started