INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Question
Chapter 21, Problem 26PS
To comment:
on the hedge ratio of a put option as stock price becomes very less.
Summary Introduction
From Black Scholes formula value of d1 is :
d 1 = ln(S0/X) + (r - δ + σ 2 /2)T σ T
And the hedge ratio N(d1) can be calculated from the abovementioned formula.
Now if the put option exercise price is very small then the hedge ratio N(d1) approaches the value of 0.
So as X increases the probability of exercise approaches to 0.
As X increases, the probability of exercise approaches to 0.
From Black Scholes formula value of d1 is :
And the hedge ratio N(d1) can be calculated from the abovementioned formula.
Now if the put option exercise price is very small then the hedge ratio N(d1) approaches the value of 0.
So as X increases the probability of exercise approaches to 0.
As X increases, the probability of exercise approaches to 0.
Expert Solution & Answer
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INVESTMENTS-CONNECT PLUS ACCESS
Ch. 21 - Prob. 1PSCh. 21 - Prob. 2PSCh. 21 - Prob. 3PSCh. 21 - Prob. 4PSCh. 21 - Prob. 5PSCh. 21 - Prob. 6PSCh. 21 - Prob. 7PSCh. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Prob. 10PS
Ch. 21 - Prob. 11PSCh. 21 - Prob. 12PSCh. 21 - Prob. 13PSCh. 21 - Prob. 14PSCh. 21 - Prob. 15PSCh. 21 - Prob. 16PSCh. 21 - Prob. 17PSCh. 21 - Prob. 18PSCh. 21 - Prob. 19PSCh. 21 - Prob. 20PSCh. 21 - Prob. 21PSCh. 21 - Prob. 22PSCh. 21 - Prob. 23PSCh. 21 - Prob. 24PSCh. 21 - Prob. 25PSCh. 21 - Prob. 26PSCh. 21 - Prob. 27PSCh. 21 - Prob. 28PSCh. 21 - Prob. 29PSCh. 21 - Prob. 30PSCh. 21 - Prob. 31PSCh. 21 - Prob. 32PSCh. 21 - Prob. 33PSCh. 21 - Prob. 34PSCh. 21 - Prob. 35PSCh. 21 - Prob. 36PSCh. 21 - Prob. 37PSCh. 21 - Prob. 38PSCh. 21 - Prob. 39PSCh. 21 - Prob. 40PSCh. 21 - Prob. 41PSCh. 21 - Prob. 42PSCh. 21 - Prob. 43PSCh. 21 - Prob. 44PSCh. 21 - Prob. 45PSCh. 21 - Prob. 46PSCh. 21 - Prob. 47PSCh. 21 - Prob. 48PSCh. 21 - Prob. 49PSCh. 21 - Prob. 50PSCh. 21 - Prob. 51PSCh. 21 - Prob. 52PSCh. 21 - Prob. 53PSCh. 21 - Prob. 1CPCh. 21 - Prob. 2CPCh. 21 - Prob. 3CPCh. 21 - Prob. 4CPCh. 21 - Prob. 5CP
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