Question
You want to buy a stock that is currently selling for $55. You forecast that in one year, the stocks price will be either $108
You want to buy a stock that is currently selling for $55. You forecast that in one year, the stocks price will be either $108 or $16, with equal probabilities. There is a one-year call option on the stock available with an exercise price of $80. You are able to borrow at a rate of 6.50%. You would like to hedge your stock position using the call option.
a. What will be the calls value if the stock price is $108 in one year? What will be the calls value if the stock price is $16 in one year? (Round your answers to the nearest dollar.)
Call value at $108 | $ |
Call value at $16 | $ |
b. What is the hedge ratio you should use? (Round your answer to 4 decimal places.)
Hedge ratio
c. Assume that you can purchase fractional shares of stock. How many shares of stock would you buy? (Round your answer to 4 decimal places.)
Shares
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