Investments

Investments Chapter 21

1-11

1. The value of a put option also increases with the volatility of the stock. P=C-S+PV(X)+PV(D) if C increases because of an increase in volatility then Put must also increase.

2. I do expect a $1 increase in call option exercise price and a decrease in option value. The change in the call price would equal $1 only if there was a 100% probability that the call would be exercised and the interest rate was zero.

3. Higher beta implies higher total stock volatility which means the value of the put option increases as beta increases.

4. The stock with a lot of firm specific risk has higher total volatility. The option on the stock with higher firm specific risk is worth more.

5. A call option with a high exercise price has a lower hedge ratio.

6. A. Put A

B. Put B

C. Call B

D. Call B

E. Call A

7. 120 hedge ratio 0/30=0 110 hedge ratio 10/30=.333 100 hedge ratio 20/30=.667 90 hedge ratio 30/30=1 when the option becomes more in the money the hedge ratio increases to a max of 1.

8. 45 -0.0268=d1 .4893=N(d1)

50 .5=d1 .6916=N(d1)

55 .9766=d1 .8356=N(d1)

9. a. uS=130 Pu=0 dS=80 Pd=30 0-30/130-80=-3/5

b. s=80 s=130

Buy 3 shares 240 390

Buy 5 puts 150 0

390/1.10= 354.545

c. 3S+5P=300+5P Value of the portfolio is $354.55 P=54.545/5=$10.91

10. 20-0/130-80=2/5

160/1.10=$145.455 2S-5C=200-5C

C=54.545/5=$10.91

10.91+110/1.10-100=10.91

11. d1= .3182 N(d1)=.6248

D2= -.0354 N (d2)=.4859

Xe^-rt= 47.56 C=$8.13