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Week 9. Problems - Option

This problem uses a two-state option pricing model to value a put option. The underlying stock can move to one of two prices in a year. The range of stock prices and put option prices across the two states is calculated. A portfolio of stock and puts is constructed to be delta neutral

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Marissa Marissa
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249 views

Week 9. Problems - Option

This problem uses a two-state option pricing model to value a put option. The underlying stock can move to one of two prices in a year. The range of stock prices and put option prices across the two states is calculated. A portfolio of stock and puts is constructed to be delta neutral

Uploaded by

Marissa Marissa
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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A call option on Jupiter Motors stock with an exercise price of $7

expiration is selling at $3. A put option on Jupiter stock with an e


and one-year expiration is selling at $2.50. If the risk-free rate is
no dividends, what should the stock price be?
Strike $
Interest rate
Time to X (% of yr)
Call Option Price =
Put Option Price =
Solution
Stock Price

cise price of $75 and one-year


stock with an exercise price of $75
sk-free rate is 8% and Jupiter pays

We will derive a two-state put option value in this problem. Data:


The two possibilities for S(t) are 130 and 80.
a. Show that the range of S is 50 while that of P is 30 across the
ratio of the put?
b. Form a portfolio of three shares of stock and five puts. What i
portfolio? What is the present value of the portfolio?
X
So
Su
Sd
r

Solution
X
0.00

a.

Pu
0.00

Pd
Hedge ratio
0.00
#DIV/0!

b.
#
3
5

Stocks
Puts

PV

Portfolio cost

0
-

problem. Data: S = 100; X = 110; 1 + r = 1.10.

30 across the two states. What is the hedge

e puts. What is the (nonrandom) payoff to this


o?

BIC owns 51,750 shares of Smith & Oates. The shares are curren
option on Smith & Oates with a strike price of $70 is selling at $3
What is the number of call options necessary to create a delta-ne
Shares of Smith & Oats
S&O share price
Call price
Call X price
Delta
Solution
# of call options to hedge

#DIV/0!

shares are currently priced at $69. A call


70 is selling at $3.50 and has a delta of .69.
o create a delta-neutral hedge?

You are attempting to value a call option with an exercise price o


The underlying stock pays no dividends, its current price is $100
chance of increasing to $120 and a 50% chance of decreasing to
is 10%. Calculate the call options value using the two-state stoc
X
So
Su
Sd
r
Solution
X
0.00

Cu
0.00

Cd
Hedge ratio
0.00
#DIV/0!

#
1.00
2.00

Stocks
Short C

0.00
0.00
-

PV
Call price

with an exercise price of $100 and one year to expiration.


its current price is $100, and you believe it has a 50%
hance of decreasing to $80. The risk-free rate of interest
sing the two-state stock price model.

You would like to be holding a protective put position on the sto


guaranteed minimum value of $100 at year-end. XYZ currently se
stock price will either increase by 10% or decrease by 10%. The
put options are traded on XYZ Co.
a. Suppose the desired put option were traded. How much would
b. What would have been the cost of the protective put portfolio?
c. What portfolio position in stock and T-bills will ensure you a p
would be provided by a protective put with X = $100? Show that
cost of establishing the portfolio matches that of the desired pro

X
So
% change
Su
Sd
r

Solution
a.

X
0.00

Stocks
Puts

Pu
0.00

#
1
1

Pd
Hedge ratio
0.00
#DIV/0!

PV

b.

Put cost

Protective put cost

ut position on the stock of XYZ Co. to lock in a


end. XYZ currently sells for $100. Over the next year, the
ecrease by 10%. The T-bill rate is 5%. Unfortunately, no

ded. How much would it cost to purchase?


otective put portfolio?
ls will ensure you a payoff equal to the payoff that
X = $100? Show that the payoff to this portfolio and the
hat of the desired protective put.

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