Question
The stock of Binomial Hedge Inc. is currently priced at $680 with volatility of 30%. The risk-free interest rate is 2%. Consider a binomial tree
The stock of Binomial Hedge Inc. is currently priced at $680 with volatility of 30%. The
risk-free interest rate is 2%. Consider a binomial tree of this stock price with three-month time steps.
Also consider a European call option that strikes at $700 and matures in six months with two-step tree
below.
(a) What are the stock prices and option values on the nodes of the tree?
(b) What are the delta and share purchase/sale on each node of the tree?
(c) What is the position in cash on each node of the tree?
(d) What is the net value of the hedged portfolio on each node of the tree?
(e) What is the average performance ratio of the hedging strategy? What is the standard deviation of
the performance ratio?
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Financial Institutions Management A Risk Management Approach
Authors: Anthony Saunders, Marcia Millon Cornett
9th edition
1259717771, 1259717772, 9781260048186, 1260048187, 978-1259717772
