We will derive a two-state put option value in this problem. Data: S0 = 290; X =

Question

We will derive a two-state put option value in this problem. Data: S0 = 290; X = 300; 1 + r = 1.1. The two possibilities for ST are 330 and 180.

a. The range of S is 150 while that of P is 30 across the two states. What is the hedge ratio of the call? (Round your answer to 2 decimal places.)

Hedge ratio =

b. Calculate the value of a call option on the stock with an exercise price of 300. (Do not use continuous compounding to calculate the present value of X in this example, because the interest rate is quoted as an effective per-period rate.) (Do not round intermediate calculations. Round your answer to 2 decimal places. )

Call value $ =

Explanation / Answer

Hedge ratio =(0-120)/(330-180)=-0.60

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.