Question

Calculate the elasticity of a call option with a premium of $6.50 and a strike price of $61. The call has a hedge ratio of 0.7, and the underlying stock’s price is currently $47.

Answer 1

Answer:

The Elasticity of the call option = $\mathbf{ 5.06 \%}$

Explanation:

From the given information:

For $1 change in stock price

the percentage  of change in stock price = ΔS/S

ΔS/S = (1× 100)/47 = 2.127659574

ΔC = hedge ratio × ΔS

ΔC = 0.7 × 1

ΔC = 0.7

However , the percentage change in the stock call option price = ΔC/C

= (0.7 × 100) / 6.50

= 70/6.50

= 10.76923077

∴

The Elasticity of the call option = $\mathbf{\dfrac{percentage \ change \ in \ the \stock \ call \ option \ price }{percentage \ change \ in \ the \ stock \ price}}$

The Elasticity of the call option = $\mathbf{ \dfrac{10.76923077 }{2.127659574}}$

The Elasticity of the call option = $\mathbf{ 5.06 \%}$

       OR

The Price Elasticity of the call option can be computed by using EXCEL FUNCTION(=B3*(B4/B1))

The illustration to that can be seen in the diagram attached below.

The Elasticity of the call option  $\simeq$ 5.06% by using EXCEL FUNCTION.