CHAPTER 21

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Unformatted text preview: Option values are calculated as follows: 1. 2. 3. d. (i) To replicate a call, buy 0.89 shares and borrow: [(0.89 ´ 200) ­ 52.63] = $125.37 (ii) To replicate a call, buy one share and borrow: [(1.0 ´ 200) ­ 70.53] = $129.47 (iii) To replicate a call, buy 0.37 shares and borrow: [(0.37 ´ 200) ­ 14.11] = $59.89 11. To hold time to expiration constant, we will look at a simple one­period binomial problem with different starting stock prices. Here are the possible stock prices: Now consider the effect on option delta: Current Stock Price Option Deltas 100 110 In­the­money (EX = 60) 140/150 = 0.93 160/165 = 0.97 At­the­money (EX = 100) 100/150 = 0.67 120/165 = 0.73 Out­of­the­money (EX = 140) 60/150 = 0.40 80/165 = 0.48 Note that, for a given difference in stock price, out­of­the­money options result in a larger change in the option delta. If you want to minimize the number of times you rebalance an option hedge, use in­the­money options. 12. a. The call option. (You would delay the exercise of the put until after the dividend has been paid and the stock price has dropped.) b. The put option. (You never exercise a call if the stock price is be...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.

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