Create delta neutral portfolio of call options and stock

Assignment Help Financial Management

Reference no: EM131077906

Consider an option on a non-dividend-paying stock when the stock price is $45, the strike price is $42, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is five months. It can be shown that d1 = .7576 and d2 = .6285.

1. Explain how to create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts).

2. How many shares would you buy or sell?

Reference no: EM131077906

Questions Cloud

Use at least two capital budgeting methods : A company has the opportunity to do any of the projects for which the net cash flows per year are shown below. The company has a cost of capital of 12%. Which should the company do and why? You must use at least two capital budgeting methods.

What is the six-month forward rate : An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?

What are stock prices and the option prices on at each node : Consider an American put option on a stock. The stock price is $5, the strike price is $10, the risk-free rate is 4% per annum, u = 1.05, d = 0.9524, p = 0.5912, and the time to maturity is three months. What are stock prices and the option prices on..

Information flows into consolidated financial statement : How does the consolidation impact how the accounting information flows into the consolidated financial statement? Describe the process. Are there any income tax benefits from consolidating the financial statements in a company?

Create delta neutral portfolio of call options and stock : Consider an option on a non-dividend-paying stock when the stock price is $45, the strike price is $42, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is five months. Explain how to create a del..

Value the option using one-step tree : Consider an American put option on a stock. The stock price is $10, the strike price is $5, the risk-free rate is 5% per annum, u = 1.05, d = 0.9524, p = 0.5912, and the time to maturity is six months. Value the option using a one-step tree.

Calculate the average return for treasury bills : Suppose we have the following Treasury bill returns and inflation rates over an eight year period: Year Treasury Bills Inflation 1 9.87% 11.87% 2 10.76 15.36 3 8.48 9.69 4 7.78 7.43 5 8.30 9.69 6 10.63 12.15 7 13.49 16.34 8 15.31 16.22 a. Calculate t..

Investors expect the stock to pay year-end dividend : A share of stock with a beta of .66 now sells for $48. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 5%, and the market risk premium is 8%. Suppose investors believe the stock will sell for $50 at year-end. Is the st..

Two different bonds currently outstanding : Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $50,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,100 every six months over the subsequent eight years, and ..

User Account

All Pages