Question

1. Using the Black-Scholes Option Pricing Model, what is the maximum price you should pay for a European call options on a non-dividend paying stock when the stock price is GHS70.00, the strike price GHS75.00, with a risk-free rate of 6% per year and a volatility 19% per year. The time to expiration is half a year?                                                            (7marks)
   

1. Using your answer above how many call options must you buy in order to create a perfect hedge given that you currently own 120 shares of the underlying stock.
       
2. Compute the delta and provide the necessary advise                                 

Answer 1

Solution:

Part A )

Using the Black Scholes option the call premium is 2.59.

Answer to part i) and part ii)

Delta of the call option is the same is 0.41 ( Given in cell I6). Delta of the option is = change in option price/change in stock price.

In order to perfectly hedge 120 shares, we will need to buy 120*0.41 = 49.4 call options