We will derive a two-state put option value in this problem. Data: S 0 = 180; X
ID: 2763902 • Letter: W
Question
We will derive a two-state put option value in this problem. Data: S0 = 180; X = 190; 1 + r = 1.1. The two possibilities for ST are 210 and 110.
The range of S is 100 while that of P is 80 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.)
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.)
Given that the stock currently is selling at 180, calculate the put value. (Round your answer to 2 decimal places.)
We will derive a two-state put option value in this problem. Data: S0 = 180; X = 190; 1 + r = 1.1. The two possibilities for ST are 210 and 110.
Explanation / Answer
Solution.
A.
uS 0 = 210 P u = 0
dS 0 = 110 P d = 80
The hedge ratio is: H = [ ( Pu - Pd ) / ( uS0 - dS0 ) = [ ( 0 - 80 ) / ( 210 - 110 ) = 80 / 100
= 8 / 10
B .
Riskless:
C.
c.The portfolio cost is: 4S + 5P = 720 + 5P
The value of the portfolio is: $763.636
Therefore: 720 + 5P =$763.636 P = $43.636/5 = $8.72.
Portfolio St = 110 St = 210 Buy 4 Share 440 840 Buy 5 puts 400 0 Total 840 840 P.V $840 / 1.10 = 763.636Related Questions
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