# 21 - 1CORRECT .PortfolioB .Thecalldeltais0.7. A PortfolioB...

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1 CORRECT Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B  consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher  dollar exposure to a change in stock price? A) Portfolio B. B) Portfolio A. C) The two portfolios have the same exposure. D) A if the stock price increases and B if it decreases. E) B if the stock price decreases and A if it increases. Feedback: 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares. 2 CORRECT A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the  hedge ratio for the call is 0.7, what would be the dollar change in the value of the  portfolio in response to a one dollar decline in the stock price? A) +\$700 B) +\$500 C) -\$1,150 D) -\$520 E) none of the above Feedback: -\$100 + [-\$1,500(0.7)] = -\$1,150. 3 CORRECT The Black-Scholes formula assumes that I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the

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## This note was uploaded on 03/07/2012 for the course BUSN 1000 taught by Professor Web during the Spring '12 term at Webster.

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21 - 1CORRECT .PortfolioB .Thecalldeltais0.7. A PortfolioB...

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