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In: Finance
A stock price is currently $50. It is known that at the end of two months...
A stock price is currently $50. It is known that at the end of two months it will be either $53 or $48. The risk-free interest rate is 10% per annum with continuous compounding. Use no arbitrage arguments. a) Whatisthevalueofatwo-monthEuropeanputoptionwithastrikepriceof$50? b) How would you hedge a short position in the option?
Solutions
Expert Solution
b) This risk can be mitigated by using call options to hedge the risk of a runaway advance in the shorted stock.Hedging refers to buying an investment designed to reduce the risk of losses from another investment. Investors will often buy an opposite investment to do this, such as by using a put option to hedge against losses in a stock position, since a loss in the stock will be somewhat offset by a gain in the option By using this way we can hedge a short position in the option.
(note-Most of the symbols can not type in this word. So that I made a handwritten note...)
ThankYou....
jeff jeffy answered 1 year agoRelated Solutions
A stock price is currently $50. It is known that at the end of two months...
A stock price is currently $50. It is known that at the end of
two months it will be either $53 or $48. The risk-free interest
rate is 10% per annum with continuous compounding. What is the
value of a two-month European call option with a strike price of
$49?
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rate is 5% per annum with continuous compounding.
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Construct a binomial tree to show the payoff of the call option
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Address the relation between the binomial...
A stock price is currently $50. It is known that at the end of one year...
A stock price is currently $50. It is known that at the end of
one year it will be either $40 and $60. The exercise price of a
one-year European call option is $55. The risk-free interest rate
is 5% per annum.
a. Construct a binomial tree to show the payoff of the call
option at the expiration date.
b. Based on the binomial tree model, what is the value of the
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c. Address the relation between the...
A stock price is currently $50. It is known that at the end ofone year...
A stock price is currently $50. It is known that at the end of
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one-year European call option is $55. The risk-free interest rate
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tree model, what is the value of the call option? (15%) Address the
relation between the binomial...
A stock price is currently $50. It is known that at the end of one year...
A stock price is currently $50. It is known that at the end of
one year it will be either $40 and $60. The exercise price of a
one-year European call option is $55. The risk free interest rate
is 5% per annum.
a. construct a binomial tree to show the payoff of the call
option at the expiration date.
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A stock price is currently $50. It is known that at the end of one month...
A stock price is currently $50. It is known that at the end
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rate is 6% per annum with continuous compounding. What is the value
of a one-month European call option with a strike price of
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