Company take in the stock for delta neutrality

Assignment Help Business Economics
Reference no: EM131742328

1. A bank has just sold a call option on 500,000 shares of a stock. The strike price is 40; the stock price is 40; the risk-free rate is 5%; the volatility is 30%; and the time to maturity is 3 months.

a. What position should the company take in the stock for delta neutrality?

b. Suppose that the bank does set up a delta neutral position as soon as the option has been sold and the stock price jumps to 42 with in the first hour of trading. What trade is necessary to maintain delta neutrality? Explain whether the bank has gained or lost money in this situation.

2. Use a three-step tree to value a three month American put option on wheat futures. The current futures price is 380 cents, the strike price is 370 cents, the risk-free rate is 5% per annum, and the volatility is 25% per annum. Explain carefully what happens if the investor exercises the option after two months. Suppose that the futures price at the time of exercise is 362 and the most recent settlement price is 360.

3. Your customers are interested in the following contract. They are willing to commit to buying a stock at a fixed price of $85 at a future date if the price of the stock P is between $80 and $90, but would like to pay the market price at that time if the price of the stock P satisfies is either less than $80, or higher than $90.

a. Plot the payoff of the contract requested by the client.

b. Is it possible to replicate this position using only the stocks, puts and calls? If you think that it is portfolio. If you think that it is impossible explain why.

Reference no: EM131742328

Questions Cloud

Second option that has an exercise price : What is the value of a second option that has an exercise price of $75? (priced at the current stock price).
Produce an original opinion based on assigned literature : Produce an original opinion based on assigned literature
Issue outstanding with a market value : The unlevered cost of equity for the company is 13 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue.
Learn lessons from broader studies of organisation risk : How project managers can learn lessons from broader studies of organisation risk and how these can be applied to project planning.
Company take in the stock for delta neutrality : bank has just sold a call option on 500,000 shares of a stock. The strike price is 40; the stock price is 40; the risk-free rate is 5%; the volatility is 30%.
Probability how many people travel to canada but not mexico : Travel. Suppose the probability that a U.S. resident has traveled to Canada is 0.18, to Mexico is 0.09, and to both countries is 0.04.
Search for one of your favorite brands : Create a 1-2 minute discussing recommendations would you give to the brand managers of your favorite brand to increase the trend line for the future?
Discuss african identity was equally difficult to argue : African identity was equally difficult to argue. What do you think they would argue today
Job satisfaction and motivating employee : Job satisfaction and motivating employee. Which was the easiest for you to understand and see how it could be applied to your work in the future

Reviews

Write a Review

Business Economics Questions & Answers

  Economics assignment

This document contains various important questions and their appropriate answers in the subject field of Economics.

  Demand and supply curves

Economics is the study of the principles governing the allocation of scarce means among competing ends when the objective of the allocation is to maximize the attainment of the ends.

  Long-run perfectly competitive equilibrium for the firm

Evaluate Government intervene and correct this situation?(a) Explain the concept of a concentration ratio. A rise in the price of magarine Explain the impact of external costs and external benefits on resource allocation long-run perfectly c..

  Supply and demand diagrams

Explain each of the following using supply and demand diagrams,  With the use of a graph, explain how these two programs affect cigarette consumption and the price of cigarettes.

  Case study: fisher-price toys

The case study of the Fisher-Price Toys, Inc., a popular case in basic economics and management from the prestigious Harvard Business School.

  Draw the production possibility curve

Draw the production possibility curve and a. Define consumer surplus and producer surplus.

  Tax revenue

The Australian government administers two programs that affect the market for cigarettes

  Maximize total welfare

How many tickets to sell to maximize total welfare.

  Difference between the cv and the ev

The change in consumer surplus (?CS) is not "theoretically" justifiable like the CV and EV but it continues to be the most widely used measure of consumer welfare change. Explain how this can be reconciled

  Depict von neumann-morgenstern utility index u in a diagram

Depict the von Neumann-Morgenstern utility index u in a diagram

  What is the market solution

What is the market solution (market price and quantity) and What is the total surplus of the society under the market solution

  Calculate gross national product and net national product

Calculate gross national product and net national product

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd