Data: S0 = 107; X = 110; 1+r = 1.12. The two possibilities for ST are 155 and 95. (Round to 2 decimal places). a. The range of S is 60 while that of P is 15 across the two states. What is the hedge ratio of the put? Hedge ratio ? b. Form a portfolio of one share of stock and four puts. What is the (nonrandom) payoff to this portfolio? Nonrandom payoff c. What is the present value of the portfolio? Present value d. Given that the stock is currently selling at 107, calculate the put value. Put value
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.
Data: S0 = 107; X = 110; 1+r = 1.12. The two possibilities for ST are 155 and 95. (Round to 2 decimal places).
a. The range of S is 60 while that of P is 15 across the two states. What is the hedge ratio of the put?
| Hedge ratio | ? |
b. Form a portfolio of one share of stock and four puts. What is the (nonrandom) payoff to this portfolio?
| Nonrandom payoff |
c. What is the
| Present value |
d. Given that the stock is currently selling at 107, calculate the put value.
| Put value |
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