IBM stock currently sells for 44 dollars per share. The implied volatility equals 45.0 percent. The risk-free rate of interest is 7.0 percent continuously compounded. If you owned 100 shares of IBM stockwith strike price 45 and maturity of 5 months, how many call options would you have to buy (sell) tocreate a delta-neutral hedge? Assume each option controls one share of IBM stock.

An option is an agreement between two parties granting one the opportunity to purchase or sell a…

Answered: with strike price 45 and maturity of 5…

with strike price 45 and maturity of 5 months, how many call options would you have to buy (sell) to create a delta-neutral hedge? Assume each option controls one share of IBM stock.

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

IBM stock currently sells for 44 dollars per share. The implied volatility equals 45.0 percent. The risk-
free rate of interest is 7.0 percent continuously compounded. If you owned 100 shares of IBM stock
with strike price 45 and maturity of 5 months, how many call options would you have to buy (sell) to
create a delta-neutral hedge? Assume each option controls one share of IBM stock.

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Using just a call option (which controls 100 shares) with a delta of 0.5 and the underlying stock, how might you put on a delta neutral position that is long volatility?
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