The current stock price of Alcoa is $90, and the stock does not pay dividends. The instantaneous risk-free rate of return is 6%. The instantaneous standard deviation of Alcoa's stock is 30%. You want to purchase a put option on this stock with an exercise price of $95 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold __________ shares of stock per 100 put options to hedge your risk. |
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Answer:
d1 = (ln(S/K) + (r + (s^2)/2)t)/(s*root(t))
d2 = d1 - s*root(t))
where S= current stock price
K = option strike price
t = time to maturity
s = volatility
r = risk free rate
c = call premium
d1 = (ln(90/95) + (.06 + (.30^2)/2) * .083)/(.30*root(.0833))
= -.523787
d2 = -.523787- .30*root(.0833)
= - .61037
N(d1) = can be found using the z -table and it is the call option's delta value.
N(d1) = Norm.DIST(-523787, 0,1, True)
= 0.300
Shares to hold = 100-0.300*100
= 100-30
= 70
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