FREE Trial

We will derive a two-state put option value in this problem. Data: S0 = 100; X =

Question:

We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80.

a. Show that the range of S is 50, whereas that of P is 30 across the two states. What is the hedge ratio of the put?

b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? What is the present value of the portfolio?

c. Given that the stock currently is selling at 100, solve for the value of the put.


Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 69% (13 reviews)

a uS 0 130 P u 0 dS 0 80 P d 30 The hedge ratio is b Riskless Portfolio ...View the full answer


answer-question-section
Answered By
tutor-profile-image
Rodrigo Louie Rey
I started tutoring in college and have been doing it for about eight years now. I enjoy it because I love to help others learn and expand their understanding of the world. I thoroughly enjoy the "ah-ha" moments that my students have. Interests I enjoy hiking, kayaking, and spending time with my family and friends. Ideal Study Location I prefer to tutor in a quiet place so that my students can focus on what they are learning.
5.00+ 1+ Reviews 10+ Question Solved
Related Book For  book-img-for-question
Investments

Investments

ISBN: 9780073530703

9th Edition

Authors: Zvi Bodie, Alex Kane, Alan J. Marcus

See More Books
Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Accounting questions

Stop Crying He Wasnt That Cute Anyway - ISBN: 979-8404091076 - Free Book