Question

Suppose that a stock sells for $42 today. One period from today, the stock price will...

Suppose that a stock sells for $42 today. One period from today, the stock price will either have risen to $50.40 or have fallen to $37.80. A European call option with exercise price $44 is available and expires at the end of the period. What is the riskless hedge ratio or option delta for this period?

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Answer #1

Exercise price of Call = 44

Up price in one period(U) = $50.40

Down price in one period(D) = $37.80

Option value for up price(V_U) = max(50.40-44,0) = 6.40

Option value for down price (V_D) = max(37.80-44,0) 0

Hedge ratio ( option delta ) would be:

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