Levered position in delta shares of stock and selling

Assignment Help Financial Management

Reference no: EM131052225

Suppose you construct an option hedge by buying a levered position in delta shares of stock and selling one call option. As the share price changes, the option delta changes, and you will need to adjust your hedge. You can minimize the cost of adjustments if changes in the stock price have only a small effect on the option delta. Construct an example to show whether the option delta is likely to vary more if you hedge with an in-the-money option, an at-the-money option, or an out-of-the-money option. Comment on your results.

Reference no: EM131052225

Questions Cloud

Calculate the current cost of a bond with a par value : A bond has a coupon rate of 3.25%, pays coupons semiannually, and has a maturity of 10 years. If the yield to maturity is 3.50%, calculate the current cost of a bond with a par value of 100. What is the current yield on the bond? What is the value or..

What is project financing : What is project financing? Discuss the difference between the project financing and the conventional direct financing and the advantages of project financing

What is portfolios beta : An individual has $20,000 invested in a stock with a beta of 0.6 and another $75,000 invested in a stock with a beta of 2.5. If these are the only two investments in her portfolio, what is her portfolio's beta?

Two stocks to be correctly priced relative to each other : A stock Y has a beta of 1.50 and an expected return of 16%. Stock Z has a beta of 0.80 and an expected return of 11%. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Levered position in delta shares of stock and selling : Suppose you construct an option hedge by buying a levered position in delta shares of stock and selling one call option. As the share price changes, the option delta changes, and you will need to adjust your hedge. You can minimize the cost of adjust..

Correlation coefficient between the returns of two stocks : The covariance of the returns between Willow Stock and Sky Diamond Stock is 0.0760. The variance of Willow is 0.2980, and the variance of Sky Diamond is 0.1250. What is the correlation coefficient between the returns of the two stocks?

Explain different option valuation methods : Explain different option valuation methods. Use the different valuation methods to value a specific option. Differentiate the intrinsic and extrinsic valuations of the option and explain how they evaluate what the different extrinsic factors are tell..

Common stock is expected to generate end-of-period dividend : A common stock is expected to generate an end-of-period dividend of $5 and an end-of-period price of $62. If this security has a beta coefficient of 1.3, the risk-free interest rate is 10%, and the expected return on the market portfolio is 19%, then..

What is the cash flow-average tax rate : Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2014, the company had revenues of $870,841, general and administrative expenses of $353,523, depreciation expenses of $131,455, leasing expenses of..

User Account

All Pages