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 120 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) A. Hedge ratio__________ b-1. Form a portfolio of 4 shares of stock and 5 puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.) Nonrandom payoff $________________ b-2. What is the present value of the portfolio? (Round your answer to 2 decimal places.) Present value $________________ c. Given that the stock currently is selling at 290, calculate the put value. (Round your answer to 2 decimal places.) Put value $_____________________

Explanation / Answer

Answer (a)

Answer : (b-1)

Answer (b-2)

Answer c

Two-state put option S - Stock Price today 290 X - Exercise Price 300 1+r 1.1 Stock Price Probability High 330 Low 180 If Stock Price 300 Put Option will not Be Exercised Hence Pay off 0 If Stock Price 180 Put Option will be exercised Hence Pay off: (300-180) 120 Hedge Ratio : Ratio of Put Option Payoff / Stock Pay offs Hedge Ratio : (0-120)/(330-180) -4/5

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