Chapter 5: Q25I (page 555)
If the stock price falls and the call price rises, then what has happened to the calloption’s implied volatility?
Increased
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Use the following case in answering Problems 10 – 15 :
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio.
As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at \(69. A call option on Smith & Oates with a strike price of \)70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?
Use the following case in answering Problems 10 – 15 : Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio.
As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is perfectly hedged against:
a. Small price changes in the underlying asset.
b. Small price decreases in the underlying asset.
c. All price changes in the underlying asset.
The Excel Applications box in the chapter (available at www.mhhe.com/bkm ; link to Chapter 17 material) shows how to use the spot-futures parity relationship to find a “term structure of futures prices,” that is, futures prices for various maturity dates.
a. Suppose that today is January 1, 2012. Assume the interest rate is 1% per year and a stock index currently at 1,200 pays a dividend yield of 2%. Find the futures price for contract maturity dates of February 14, 2012, May 21, 2012, and November 18, 2012.
b. What happens to the term structure of futures prices if the dividend yield is lower than the risk-free rate? For example, what if the interest rate is 3%?
A put option on a stock with a current price of \(33 has an exercise price of \)35. The price of the corresponding call option is $2.25. According to put-call parity, if the effective annual risk-free rate of interest is 4% and there are three months until expiration, what should be the value of the put?
These three put options all are written on the same stock. One has a delta of -.9, one a delta of -.5, and one a delta of -.1. Assign deltas to the three puts by filling in the table below.
Put | X | Delta |
A | 10 | |
B | 20 | |
C | 30 |
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