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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 Fall '04
 JAMESBRIDGEMAN
 Math, Probability

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