Question

In: Finance

a. Malmentier SA stock is currently priced at $65, and it does not pay dividends. The...

a.

Malmentier SA stock is currently priced at $65, and it does not pay dividends. The instantaneous risk-free rate of return is 7%. The instantaneous standard deviation of Malmentier SA stock is 30%. You want to purchase a put option on this stock with an exercise price of $70 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk.

b.

The binomial option price approaches the Black Scholes price when ____________.

Solutions

Expert Solution

Delta of call is N(d1)=0.2261
Delta of put=N(d1)-1=0.2261-1=-0.7739

You should hold -Delta*Number of puts=-(-0.7739*100)=77 shares

The binomial option price approaches the Black Scholes price when the number of subintervals increases substantially


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