value 1.25 points A collar is established by buying a share of stock for $61, bu

Question

value 1.25 points A collar is established by buying a share of stock for $61, buying a six-month put option with exercise price $55, and writing a six-month all option with exercise price $65. Based on the volatility of the stock, you calculate that for an exercise price of $55 and maturity of si months. M ) = 0.7106, whereas for the exercise price of $65, Md) = 0.6510 What will be the gain or loss on the collar if the stock price increases by $1? (Input the amount as a positive value. Round your answer to 3 decimal places.) Click to select) | of $

Explanation / Answer

Delta of call=N(d1)

Delta of put=Delta of call -1 =N(d1)-1

Hence, delta of call=0.7106

delta of put=0.6510-1=-0.349

If stock price rises by 1, call rpice would rise by 0.7106 and put price would go down by 0.349

Hence, we would lose 0.349 on put and as we have sold the call, we will lose 0.7106 on call

Total loss=0.349+0.7106=$1.0596

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