Suppose spot silver is selling for $1,000 per ounce. It will either rise by 10% or fall by 10% over the next period. The interest rate over the period is 5%.

1) What is the value of a European call on silver with a strike price of $1,000? What is the hedge ratio?

2) Redo 1) When the price of silver can either rise by 20% or fall by 10%, other things being equal, how do you account for any change, or lack of it, in the value of the call option? What is the hedge ratio?

3) Redo 1) When the price of silver can either rise by 20% or fall by 20%, other things being equal, how do you account for any change, or lack of it, in the value of the call option? What is the hedge ratio?

4) What will the prices of puts be in 1), 2), 3)?

Answer rating: 100% (QA)

To solve the given questions well use the BlackScholes formula for European call and put options The formula is as follows Call Option C S Nd1 X er T ... View the full answer