INVESTEMENTS (LL) W/CONNECT <CUSTOM>
11th Edition
ISBN: 9781264263554
Author: Bodie
Publisher: MCG
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Chapter 20, Problem 28PS
Summary Introduction
To create: A Portfolio which includes both calls and put options at a stock price of $53.
Introduction:
Volatility: Volatility can be defined as debt or liability which changes instantly and is unpredictable. In financial terminology, volatility is supposed to be the range or degree of trading price series variation over a said period when measured by the standard deviation of return in logarithm. Normally, the measure of time series of old market prices is measured in historic volatility.
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A stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.
A stock has a price of $73, which can later be
$77 or $69 with equal probabilities. The
options with exercise price $77 are valued at
$1.53 for the call and $1.73 for the put.
a. Calculate the gains/losses/returns for the
stock.
b. Calculate the gain/losses/returns for a
covered call and protective put portfolio.
You use the Black-Scholes-Merton model for a put option on a stock. You calculate N(d1) = 0.60 and N(d2) = 0.56. a) What is the delta of the put option? b) You short 100 put options. How would you hedge your delta exposure using the underlying stock? How many shares would you need to buy or sell?
Chapter 20 Solutions
INVESTEMENTS (LL) W/CONNECT <CUSTOM>
Ch. 20 - Prob. 1PSCh. 20 - Prob. 2PSCh. 20 - Prob. 3PSCh. 20 - Prob. 4PSCh. 20 - Prob. 5PSCh. 20 - Prob. 6PSCh. 20 - Prob. 7PSCh. 20 - Prob. 8PSCh. 20 - Prob. 9PSCh. 20 - Prob. 10PS
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- You use the Black-Scholes-Merton model for a put option on a stock. You calculate N(d1) = 0.60 and N(d2) = 0.56. a) What is the delta of the put option? Solution for A = -0.40 b) You short 100 put options. How would you hedge your delta exposure using the underlying stock? How many shares would you need to buy or sell?arrow_forwardA stock has a price of $73, which can later be $77 or $69 with equal probabilities. The options with exercise price $77 are valued at $1.53 for the call and $1.73 for the put. Calculate the gains/losses/returns for the stock. Calculate the gain/losses/returns for a covered call and protective put portfolio.arrow_forwardanswer these questions in 100 words or less Your discussion mentions risk premiums. Can you give an example of a stock that offers a risk premium? Where would you look to find such a stock?arrow_forward
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