Data: S0 = 120; X = 126; 1+r = 1.05. The two possibilities for ST are 150 and 102. (Round to 2 decimal places). The range of S is 48 while that of C is 24 across the two states. What is the hedge ratio of the call? Hedge ratio ? Calculate the value of a call option on the stock with an exercise price of 126. (Do not use continuous compounding to calculate the present value of X in this example because we are using a two-state model here; the assumed 5% interest rate is an effective rate per period.) Call value ?
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
Data: S0 = 120; X = 126; 1+r = 1.05. The two possibilities for ST are 150 and 102. (Round to 2 decimal places).
The range of S is 48 while that of C is 24 across the two states. What is the hedge ratio of the call?
| Hedge ratio | ? |
Calculate the value of a call option on the stock with an exercise price of 126. (Do not use continuous compounding to calculate the present value of X in this example because we are using a two-state model here; the assumed 5% interest rate is an effective rate per period.)
| Call value | ? |
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