What should be the hedge ratio

Assignment Help Finance Basics

Reference no: EM13278687

A stock price is currently $42. Its stock price will be either $45 or $38 one year from now. The risk-free rate is 5%. A one-year call on the stock has an exercise price of $40. (a) What are its intrinsic values at stock prices of $45 and $38, respectively? (b) What should be the hedge ratio? (c) What should be the value of the hedged portfolio at expiration? (d) What is the value of the call today? (e) Verify your answer using the risk-neutral approach-do not just say that you have the same answer; you will need to show the work that the two approaches give the same answer.

Reference no: EM13278687

Questions Cloud

Find the volume of water used of the station : The effective water head for a 100 MW station is 220 metres. The station supplies full loadfor 12 hours a day. If the overall efficiency of the station is 86.4%,find the volume of water used.

Find the force that the left cable exerts on the board : Ray decides to paint the outside of his uncle's house. He uses a 4.0-m-long board supported by cables at each end to paint the second floor. find the force that the left cable exerts on the board

Calculate the volume of water used when delivering a load : An hydro-electric station has a turbine of efficiency 86% and a generator of efficiency 92%. The effecitive head of water is 150 m. Calculate the volume of water used when delivering a load of 40 MWfor 6 hours. Water weighs /000 kglm3.

What positions you need to take in each of the options : What positions you need to take in each of the options to create a bullish call spread? Bearish call spread? Describe the payoffs at various stock prices with a set of equations or table, for each strategy. Show all work.

What should be the hedge ratio : Verify your answer using the risk-neutral approach-do not just say that you have the same answer; you will need to show the work that the two approaches give the same answer.

Find amount of electrical energy exdpended in raising temp : Find the amount of electrical energy exdpended in raising the temperature of 45 litres of water by 75°C. To what height could a weight of 5 tonnes be raised with the expenditure of the same energy.

Calculate the dollar cost of each of the proposed plans : If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?

What value resistor should be used to generate the heat : A 22.5 ohm resistor is connected across a 15 V battery. What value resistor should be used to generate the same amount of heat if the power source is 283 Vp-p at 60 Hz

Determine the price and number of shares outstanding of each : Determine the price and number of shares outstanding of each stock at the beginning of Week 1 (time t), and also at the end of Week 4 (time t+1). It may help to put this data in a table like this.

User Account

All Pages