12. Use the data in the table to answer the following questions. Assume that call and...

  

Transcribed Image Text:

12. Use the data in the table to answer the following questions. Assume that call and put options are available in a contract covering 100 shares. STOCK PRICE EXERCISE PRICE EXPIRATION (YEARS) STD. DEV. OF RETURNS RISK FREE RATE INPUTS 10.0000 10.0000 0.5000 30.00% 5.00% OPTION VALUE DELTA OUTPUTS CALL 0.963 0.589 PUT 0.717 -0.411 a) If you owned 1,000 shares of stock, describe the quantity and type of transaction (buy or write) to hedge using call options. b) If you owned 1,000 shares of stock, describe the quantity and type of transaction (buy or write) to hedge using put options. Three months after establishing the hedge described above, the stock price has fallen to $8.00, and the options values are: OUTPUTS INPUTS 8.0000 10.0000 0.2500 STOCK PRICE EXERCISE PRICE EXPIRATION (YEARS) STD. DEV. OF RETURNS c) Calculate the profit on the stock, calls, and total hedge if you used the calls: 30.00% CALL OPTION VALUE DELTA 0.048 0.092 d) Calculate the profit on the stock, puts, and total hedge if you used the puts. PUT 1.924 -0.908 e) Which hedge worked better, the calls or puts? Explain using the concept of delta. 12. Use the data in the table to answer the following questions. Assume that call and put options are available in a contract covering 100 shares. STOCK PRICE EXERCISE PRICE EXPIRATION (YEARS) STD. DEV. OF RETURNS RISK FREE RATE INPUTS 10.0000 10.0000 0.5000 30.00% 5.00% OPTION VALUE DELTA OUTPUTS CALL 0.963 0.589 PUT 0.717 -0.411 a) If you owned 1,000 shares of stock, describe the quantity and type of transaction (buy or write) to hedge using call options. b) If you owned 1,000 shares of stock, describe the quantity and type of transaction (buy or write) to hedge using put options. Three months after establishing the hedge described above, the stock price has fallen to $8.00, and the options values are: OUTPUTS INPUTS 8.0000 10.0000 0.2500 STOCK PRICE EXERCISE PRICE EXPIRATION (YEARS) STD. DEV. OF RETURNS c) Calculate the profit on the stock, calls, and total hedge if you used the calls: 30.00% CALL OPTION VALUE DELTA 0.048 0.092 d) Calculate the profit on the stock, puts, and total hedge if you used the puts. PUT 1.924 -0.908 e) Which hedge worked better, the calls or puts? Explain using the concept of delta.

Answer rating: 100% (QA)

a To hedge using call options you would need to buy 10 contracts 1000 shares x 10 con... View the full answer