ABL shares are currently trading at a price of $30, while HHT shares are trading at a price of $37.98. The risk-free rate is 1.24% per year. Using the information above, perform each of the following tasks: c) Compute the Delta (number of shares) that if you also short a call on HHT will create a risk-free portfolio. Assume the call is European and that the strike-price is $34.7517 d) Using the information above, compute the risk-neutral probability of HHT shares increasing 10% if the time-step to the next node is 1 year. f) Find the Black-Scholes price of the call on ABL with a strike price of $29.19 if there is 6 months until the call expires and the annual standard deviation of the stock price is 20%.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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ABL shares are currently trading at a price of $30, while HHT shares are trading at a price of $37.98. The risk-free rate is 1.24% per year. Using the information above, perform each of the following tasks:
c) Compute the Delta (number of shares) that if you also short a call on HHT will create a risk-free portfolio. Assume the call is European and that the strike-price is $34.7517
d) Using the information above, compute the risk-neutral probability of HHT shares increasing 10% if the time-step to the next node is 1 year.
f) Find the Black-Scholes price of the call on ABL with a strike price of $29.19 if there is 6 months until the call expires and the annual standard deviation of the stock price is 20%.
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