Lisa likes to buy puts on the stock XYZ. The stock is trading at $25.0 bid / 25.10 offered. The 1 - year XYZ $20 Put is offered at $2.00. (Assume that each option corresponds to one share of XYZ). Lisa wants to buy the put and hedge with stock, so as to be delta-neutral when the trade starts. What stock trade should she do? What would be ber total cost for putting on the trade
Lisa likes to buy puts on the stock XYZ. The stock is trading at $25.0 bid / 25.10 offered. The 1 - year XYZ $20 Put is offered at $2.00. (Assume that each option corresponds to one share of XYZ). Lisa wants to buy the put and hedge with stock, so as to be delta-neutral when the trade starts. What stock trade should she do? What would be ber total cost for putting on the trade
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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![Lisa likes to buy puts on the stock XYZ. The stock is
trading at $25.0 bid / 25.10 offered. The 1 - year XYZ
$20 Put is offered at $2.00. (Assume that each option
corresponds to one share of XYZ). Lisa wants to buy the
put and hedge with stock, so as to be delta-neutral
when the trade starts. What stock trade should she do?
What would be her total cost for putting on the trade
(stock plus option)? [Hint: compute the implied volatility
of the put first.] Assuming that implied volatility remains
the same, that the interest rate is zero, and that the
stock pays no dividends.
What would be her profit/ loss in one year if XYZ price
rose to $26?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1ff0df09-a6ba-448f-9302-7d05218b129d%2Ffd176567-67fc-496a-8acd-2e516365f4bf%2F1gic42r_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Lisa likes to buy puts on the stock XYZ. The stock is
trading at $25.0 bid / 25.10 offered. The 1 - year XYZ
$20 Put is offered at $2.00. (Assume that each option
corresponds to one share of XYZ). Lisa wants to buy the
put and hedge with stock, so as to be delta-neutral
when the trade starts. What stock trade should she do?
What would be her total cost for putting on the trade
(stock plus option)? [Hint: compute the implied volatility
of the put first.] Assuming that implied volatility remains
the same, that the interest rate is zero, and that the
stock pays no dividends.
What would be her profit/ loss in one year if XYZ price
rose to $26?
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