4. The price of a non-dividend-paying stock is 65. A market-maker writes a 1-year put option on the stock with a strike price of 60 for a premium of 3. To hedge this put option, the market-maker sells the stock short. The annual effective risk-free interest rate is 0.03. Calculate the profit of the market-maker if at the end of the year the stock price is 75. (A) -8.05 (B) -4.96 (C) -1.87 (D) 1.22 (E) 4.31
4. The price of a non-dividend-paying stock is 65. A market-maker writes a 1-year put option on the stock with a strike price of 60 for a premium of 3. To hedge this put option, the market-maker sells the stock short. The annual effective risk-free interest rate is 0.03. Calculate the profit of the market-maker if at the end of the year the stock price is 75. (A) -8.05 (B) -4.96 (C) -1.87 (D) 1.22 (E) 4.31
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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4. The price of a non-dividend-paying stock is 65. A market-maker writes a 1-year put option
on the stock with a strike price of 60 for a premium of 3. To hedge this put option, the market-maker
sells the stock short. The annual effective risk-free interest rate is 0.03. Calculate the profit of the
market-maker if at the end of the year the stock price is 75.
(A) -8.05 (B) -4.96 (C) -1.87 (D) 1.22 (E) 4.31
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