You want to buy a stock that is currently selling for $60. You forecast that in one year the stock price will be either $110 or $20. There is a one year option on the stock available with an exercise price of $80. You are able to borrow at a rate of 6.5%. You would like to hedge your stock position using the call option.

1a) What will be the call's value if the stock price is $110 in one year?

• $0
• $30
• $80
• $110

1b) What will be the call's value if the stock price is $20 in one year?

• $0
• $30
• $80
• $110

1c) What is the hedge ratio you should use?

• 1/4
• 1/3
• 1/2
• 1

1d) Suppose that you buy 1 share of the stock. What position should you take in the call option(s)?

• Short
• Long

1e) How many call options should you buy or sell to construct a perfectly hedged portfolio?

• 1
• 2
• 3
• 4

1f) What will be the value of your portfolio (combined stock and option position) in one year if the stock's price turns out to be $110?

• $0
• $20
• $50
• $110

1g) What will be the value of your portfolio if the stock price turns out to be $20?

• $0
• $20
• $50
• $110

1h) What is the present value of the amount you found in the previous two questions?

• $0
• $15.19
• $18.78
• $22.56

1i) What is the value of the call option today?

• $12.56
• $13.74
• $14.57
• $15.99

1j) Suppose that the call option is selling for $14.50, instead. How would you combine options stocks to make arbitrage profits?

• Buy a stock,sell 3 call options, and borrow $16.50
• Buy 3 stocks, sell 1 call options, and borrow $16.50
• Sell a stock and buy 3 call options
• Sell 3 stocks and buy 1 call option