Chapter 5: Q22I (page 554)
All else being equal, is a call option on a stock with a lot of firm-specific risk worth more than one on a stock with little firm-specific risk? The betas of the stocks are equal.
With increase in beta, the put option would also increase.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is -6. What is the hedge ratio of an at-the-money straddle position on IBM?
The agricultural price support system guarantees farmers a minimum price for their output. Describe the program provisions as an option. What is the asset? The exercise price?
You establish a straddle on Walmart using September call and put options with a strike price of \(50. The call premium is \)4.25 and the put premium is \(5.
a. What is the most you can lose on this position?
b. What will be your profit or loss if Walmart is selling for \)58 in September?
c. At what stock prices will you break even on the straddle?
Imagine that you are holding 5,000 shares of stock, currently selling at \(40 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of \)45 are selling at \(2, and January puts with a strike price of \)35 are selling at \(3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at (a) \)30? (b) \(40? (c) \)50?
Compare these proceeds to what you would realize if you simply continued to hold the shares.
a. A butterfly spread is the purchase of one call at exercise price X 1, the sale of two calls at exercise price X 2 , and the purchase of one call at exercise price X 3 . X 1 is less than X 2 , and X 2 is less than X 3 by equal amounts, and all calls have the same expiration date. Graph the payoff diagram to this strategy.
b. A vertical combination is the purchase of a call with exercise price X 2 and a put with exercise price X 1, with X 2 greater than X 1 . Graph the payoff to this strategy.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
