Questions from Business Statistics

Q: Show how a delta hedge using a position in the stock and

Show how a delta hedge using a position in the stock and a long position in a put would be set up?

Q: On November 1, the one-month LIBOR rate is 4

On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed funds futures contracts trades at a 25 basis point rate under one-month LIBOR at the...

Q: Suppose a stock is priced at $80 and has a volatility

Suppose a stock is priced at $80 and has a volatility of 0.35. You buy a call option with an exercise price of $80 that expires in three months. The risk-free rate is 5 percent. Answer the following q...

Q: Suppose you subscribe to a service that gives you estimates of the

Suppose you subscribe to a service that gives you estimates of the theoretically correct volatilities of stocks. You note that the implied volatility of a particular option is substantially higher tha...

Q: Repeat the previous problem, but close the positions on September 20

Repeat the previous problem, but close the positions on September 20. Use the spreadsheet to find the profits for the possible stock prices on September 20. Generate a graph and use it to identify the...

Q: Answer the following questions as they relate to implied volatilities.

Answer the following questions as they relate to implied volatilities. a. Can implied volatilities be expected to vary for options on the same stock with the same exercise price but different expirat...

Q: What factors contribute to the difficulty of making a delta hedge be

What factors contribute to the difficulty of making a delta hedge be truly risk-free?

Q: A stock is priced at $50 with a volatility of 35

A stock is priced at $50 with a volatility of 35 percent. A call option with an exercise price of $50 has an expiration in one year. The risk-free rate is 5 percent. Construct a table for stock prices...

Q: Let the standard deviation of the continuously compounded return on the stock

Let the standard deviation of the continuously compounded return on the stock is 21 percent. Ignore dividends. Respond to the following: a. What is the theoretical fair value of the October 165 call?...

Q: Use the Black–Scholes–Merton European put option pricing formula

Use the Black–Scholes–Merton European put option pricing formula for the October 165 put option. Repeat parts a, b, and c of the previous problem with respect to the put.