Reference no: EM132535496

Question 1: ABL shares are currently trading at a price of $12, while HHT shares are trading at a price of $6. The risk-free rate is 1.67% per year. Using the information above, perform each of the following tasks:

a) Identify which of the following options are in-the-money, out-of-the-money or at-the-money: Call on ABL with a strike of $9, Call on ABL with a strike-price of $8, Put on HHT with a strike-price of $1.8

b) If HHT shares have a 10% chance of increasing by 10% and a 90% chance of decreasing by 11% by the date of the option expiration, what will be the expected return on HHT shares and the expected return on a protective put position? For simplicity you may assume the put has a price of $1 and has the same strike-price as listed above.

c) Compute the Delta (number of shares) that if you also short a call on HHT will create risk-free portfolio. Assume the call is European and that the strike-price is $5.67

d) Using the information above, compute the risk-neutral probability of HHT shares increasing 10% if the time-step to the next node is 1 year.

e) Identify the name of the strategy that has one long call and one long put. Any and all options may be assumed to have the same strike-price in answering this question.

f) Find the Black-Scholes price of the call on ABL with a strike price of $9 if there is 6 months until the call expires and the annual standard deviation of the stock price is 20%.