EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 21, Problem 48PS
a.
Summary Introduction
To calculate: Increment in option portfolio and of how much worth of market-index portfolio should JP Morgan purchases to be ahead.
Introduction:
Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.
b.
Summary Introduction
To calculate: The number of put option to buy or sell when $1000 worth of stock is represented by index at current price.
Introduction:
Put option: It is a contract in which certain right is given to sell the underlying asset to any person or organization at a price fixed irrespective of changes in market prices during the agreed period of time.
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Could you help me with question c) please?
Suppose that put options on a stock with strike prices $66 and $75 cost $3 and $5, respectively.
How can the options be used to create (a) a bull spread and (b) a bear spread?
For what range of future stock prices will the bear spread strategy be profitable.
Is the profit for the bear spread strategy limited? If so, how much and at what price range?
At what price range will you exercise the long position from the bear spread strategy?
At what range of future stock prices will the bear spread strategy lead to a loss?
What is the maximum loss that you can incur from bear spread strategy and at what price range?
D3)
Finance
a) What does the option delta refer to? For a standard European put option, draw the graph of the delta as a function of the price of the underlying asset.
b) You have delta hedged a long call position on a stock. The stock price drops. Explain how you would adjust your hedge
Chapter 21 Solutions
EBK INVESTMENTS
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
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- You think MBB stock has potential for an upward move in price. You have noposition whatsoever in the stock now. You would like to take opportunity of anyup movement in price but want to strictly limit your downside risk. MBB stock pricenow is RM 12.00. a. Given the information below, outline TWO possible appropriate strategies. Foreach strategy,• State the position• Graph the strategy• Outline the risk profile, and• State the maximum profit, maximum loss, and break-even point(s). 30-day calls 30-day put 11 call @ 1.55 11 put @ 0.25 12 call @ 0.70 12 put @ 0.45 12 call @ 0.22 13 put @ 1.40arrow_forwardAssume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: O is underpriced O is correctly priced. O will plot below the security market line. O will plot on the security market line. A Moving to another question will save this response. Question 4 of 30arrow_forwardAccording to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.arrow_forward
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