Professional Documents
Culture Documents
Chapter 16
2.
4.
5.
80
$8000
0
100
$10000
0
110
$11000
$10,000
120
$12000
$20000
$9,360
$9,360
$10,360
$10,360
80
-20%
-100%
-6.4%
100
0%
-100%
110
10%
0%
-6.4%
+3.6%
For questions 9, 10, and 13, please see me if you have any problems.
120
20%
100%
+13.6%
Chapter 17:
4.
5.
Buy 3 Shares
Buy 5 puts
TOTAL
CF today
-300
-5P
3*130 = $390
0
3*80 = $240
5*30 = $150
-(300+5P)
$390
$390
Since the payoff is the same in either outcome, this is a riskless portfolio which
should earn 10% rate of return. So the most I would be willing to pay for it today
is the present value of $390 discounted at 10%
= 390/(1.1) = $354.54
In equilibrium,
300+5P = 354.54
So
P = $10.91
7.
Use the Black-Scholes equation for call premium (refer to book or notes).
The call premium = $ 8.13
[Steps involved are
1.
calculate d1 (=0.3181) and N(d1) (=0.6248)
2.
calculate d2 (=-0.03536) and N(d2) (=0.4859)
3.
calculate C which turns out to be $8.13
14.
Call option with a high exercise price will have a lower hedge ratio.
20.
23.
A collar is formed by buying 1 shares at S=50; buying one put with the exercise
price of $45; and shorting 1 call with the exercise price of $55.
In addition, we are told that for X=45, the N(d1) = 0.6
And for X=55, the N(d1) = 0.35
What happens to the value of the collar if there is a small rise in the stock price?
We need to calculate the sum of the individual deltas to determine the
delta of the portfolio.
Component of collar
Stock
Long P (x=45)
Short C (x=55)
Individual delta
1
N(d1)-1 = 0.6-1 = -0.4
-N(d1) = -0.35
The delta of the share is 1 since this asset will increase in value by $1 for
every $1 increase in the stock price
The delta of a put is given by N(d1) 1. The exercise price of the put is
$45 so the relevant N(d1) =0.6 and the delta of the put then is 0.4
The delta of a call is given by N(d1). The exercise price of the call is $55
so the relevant N(d1) = 0.35. However, we are shorting the call, so the
delta is 0.35
Adding the three individual delta yields 0.25. So, if the stock price
increases by $1, the value of the collar will increase by $0.25.