Explaining strengthening basis benefits a short hedge

Reference no: EM1310621

Q1) Revarop, Inc., is fast-growth company which is expected to increase at a rate of 23% for the next 4 years. It is then expected to rise at the constant rate of 6%. Revarop’s first dividend, of $3.26, will be paid in year three. If required rate of return is 17%, what is the present value of stock if dividends are expected to rise at the same rate as company?

Q2) Describe why strengthening basis benefits a short hedge and hurts a long hedge.

Q3) What are implied volatilities? Can implied volatilities be expected to differ for options on same stock with same expiration but dissimilar strike prices?

Reference no: EM1310621

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