INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 21, Problem 27PS
Summary Introduction
To determine:
the hedge ratio of an at the money straddle position..
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The hedge ratio of an at-the-money call option on IBM is 0.37. The hedge ratio of an at-the-money put option is −0.63. What is the hedge ratio of an at-the-money straddle position on IBM?
Note: Negative answer should be indicated by a minus sign. Round your answer to 2 decimal places.
In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike price
Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if S0 = (1 + r)T..
Chapter 21 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- According to the Black-Scholes formula, what will be the hedge ratio (delta) of a put option for a very small exercise price?arrow_forwardWe showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.arrow_forwardThe hedge ratio of a call option is A) A positive constantB) Negative and larger than -1 C) Positive and larger than 1 D) Positive and smaller than 1arrow_forward
- According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.arrow_forwardSuppose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what would be more expensive: a call option on X or Y? Please discuss.arrow_forwardWhat impact does each of the followingparameters have on the value of a call option?(1) Current stock pricearrow_forward
- Suppose you observe the following situation on two securities:Security Beta Expected Return Pete Corp. 0.8 0.12 Repete Corp. 1.1 0.16 Assume these two securities are correctly priced. Based on the CAPM, what is the return on the market?arrow_forwardWhat impact does each of the followingparameters have on the value of a call option?(5) Variability of the stock pricearrow_forwardReconsider the determination of the hedge ratio in the two-state model, where we showed that one-third share of stock would hedge one option. What would be the hedge ratio for the following exercise prices: (a) 120, (b) 110, (c) 100, (d) 90? (e) What do you conclude about the hedge ratio as the option becomes progressively more in the money?arrow_forward
- Hedger A and hedger B are hedging price risk in the same futures market, and hedger A is more risk averse than hedger B. Assume all the optimal hedge assumptions are satisfied. Which of the following is true about the optimal hedge size for hedger A and B? (i) Hedger A will hedge a greater proportion of their cash position than hedger B. (ii) Hedger A will hedge a smaller proportion of their cash position than hedger B. (iii) Hedger A is guaranteed to hedge 100% of their cash position. (iv) Hedger B is guaranteed to make a higher return than hedger A.arrow_forward. Answer the following in a couple of sentences. d) Compare and contrast options with futures e) Compare swaps with forwardsarrow_forwardWhat is Put-Call Parity (select the best answer)? Group of answer choices Put-Call Parity suggests that puts and calls have equal, but opposite, values. Uses arbitrage arguments showing that a portfolio of the underlying stock plus a put has the exact same payoffs as a portfolio of a risk-free bond plus a call. Thus, those two portfolios must have equal value. Uses arbitrage arguments to show that the value of a Put is equal to the value of a Call plus the Stock Price. Uses arbitrage arguments to show that the value of a Call is equal to the value of the underlying stock plus the value of a Put.arrow_forward
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