CHAPTER_21 - CHAPTER 21 Valuing Options Answers to Problem...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 CHAPTER 21 Valuing Options Answers to Problem Sets 1. a. Using risk-neutral method, ( p X 20) + (1 - p )(-16.7) = 1, p = .48. Value of call = ( ) ( ) 8 . 3 01 . 1 0 52 . 8 48 . = × + × b . Delta = = 544 . 7 . 14 8 = c. d. Possible stock prices with call option prices in parentheses:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 e. Delta = = 544 . 7 . 14 8 = 2. (a) No. The maximum delta is 1.0 when the ratio of stock price to exercise price is very high. (b) No. (c) Delta increases. (d) Delta increases. 3. Using the replicating-portfolio method: a. If month 3 stock price = 350.85, delta = (30 – 0)/(430-286.27) = .209 To replicate call, buy .209 shares, and borrow PV(59.752) Option value = .209 X 350.85 – 59.752/1.0075 = 13.93 b. If month 3 stock price = 527, delta = (245.90 – 30)/(645.90 – 430) = 1 To replicate call, buy 1 share, and borrow PV(527) Option value = 1 X 527 – 400/1.0075 = 129.98 c. At month 0 delta = (129.98 – 13.93)/(527 – 350.85) = .659 To replicate call, buy .659 shares, and borrow PV(217.29) Option value = .659 X 430 – 217.29/1.0075 = 67.7 Using the risk-neutral method: p X .2269 + (1 – p) X .184 = 0.0075: p = .4671 a. If month 3 stock price = 350.85
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

CHAPTER_21 - CHAPTER 21 Valuing Options Answers to Problem...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online