The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 12.7% per year, or about 1% per month. a. What is the value of a one-month call option with an exercise price of $40? b. What is the option delta? c. What is the option delta of the two-month call over the first one-month period?
The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 12.7% per year, or about 1% per month. a. What is the value of a one-month call option with an exercise price of $40? b. What is the option delta? c. What is the option delta of the two-month call over the first one-month period?
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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1. The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 12.7% per year, or about 1% per month.
a. What is the value of a one-month call option with an exercise price of $40?
b. What is the option delta?
c. What is the option delta of the two-month call over the first one-month period?
d. Show how the payoffs of this call option can be replicated by buying HM’s stock andborrowing.
e. What is the value of a two-month call option with an exercise price of $40?
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