contestada

Show that Black-Scholes call option hedge ratios also increase as the stock price increases. Consider a 1-year option with exercise price $50, on a stock with annual standard deviation 20%. The T-bill rate is 3% per year. Find N(d1) for stock prices $45, $50, and $55.

Respuesta :

codedmog101

Answer:

Check explanation.

Explanation:

A call option hedge ratio shows how an option price with respect to price changes in the underlying stock. A call option hedge ratio is used in determining the number of shares of stocks to hedge an option position.

We have Call option with the following characteristics:

X = 50; T=1 year; standard deviation = 20%; T-bill rate = 3%.

Hedge ratio = N(d1) from the Black-Scholes equation

For S=$45, d1 = -0.0268 and N(d1) =0.489309.

For S = $50, d1 = 0.5 and N(d1) = 0.6915.

If S = $55, d1 = 0.97655 and N(d1) = 0.8356.

From the above values obtained, it means that the price of the call option becomes more sensitive to changes in the price of the stock at higher stock prices.

Otras preguntas