1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
tensa zangetsu [6.8K]
2 years ago
14

Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $90 are selling at an implied vo

latility of 30%. ExxonMobil stock currently is $90 per share, and the risk-free rate is 4%.
1) If you believe the true volatility of the stock is 32%, how can you trade on your belief without taking on exposure to the performance of ExxonMobil? How many shares of stock will you hold for each option contract purchased or sold?

2) Using the data in the previous problem, suppose that 3-month put options with a strike price of $90 are selling at an implied volatility of 34%. Construct a delta-neutral portfolio comprising positions in calls and puts that will profit when the option prices come back into alignment.
Business
1 answer:
vovikov84 [41]2 years ago
6 0

Answer:

N(d1) =0.5567

Selling at lower implied votality of 30% shows that call options are underpriced. So, in order to hedge, investors must buy options and short 0.5567 shares for each call bought.

2.

The delta is often called the hedge ratio, for example, if you have a portfolio of 'n' shares of a stock, therefore, 'n' divided by the delta gives you the number of calls you would need to be short to create a gedge. In such a "delta neutral" portfolio, a gain whatsoever in the value of the shares held due to an increase in the share price would be exactly offset by a loss on the value of the calls writter, and vice-versa.

Explanation:

Stock price So= $90

Interest rate= 4% per year

Exercise price = $90

True volatility= 32%

Implied votality= 30%

Time of expiration= 0.25 per year.

Using Hedge ratio to calculate is shown below.

d1= In(So/X) + (r + σ/2)T/σ√T

d1= ln(90/90) +(0.04+0.32^2/2) 0.25/ 0.32√0.25

= 0 + (0. 04+0.512) × 0.25/ 0.32 × 0.50

= 0.14250

N(d1) = N(0.14250)

= 0.5567

b. An investor taking long position would expect that the underly stock price will become lower in future. He has to pay the put option that makes him have the right to sell his underlying stock at strike price at the expiry of options which will enable him make profit at the strike price when underlying stock decreases. If it turns the other way round and underlying stock increases, he will be at loss. Although, maximum loss is limited to put option.

An investor can short the underlying stock if he is of the opinion that the share value is overvalued and will become lower in short tenure. Therefore, he sell at a higher price in expectation that the underlying stock will decrease.

If the stock decreases, he will buy the share at a lower price and book profit as the difference in stock and selling price and vice-versa, he has to buy his share at higher price and then close his position.

From the above, selling at lower implied votality of 30% shows that call options are underpriced. So, in order to hedge, investors must buy options and short 0.5567 shares for each call bought.

2.

The same approach is applicable for answer 2, by using the implied volatility of 34%.

The delta is often called the hedge ratio, for example, if you have a portfolio of 'n' shares of a stock, therefore, 'n' divided by the delta gives you the number of calls you would need to be short to create a gedge. In such a "delta neutral" portfolio, a gain whatsoever in the value of the shares held due to an increase in the share price would be exactly offset by a loss on the value of the calls writter, and vice-versa.

You might be interested in
What is the primary characteristic that differentials a zero based budget from a conventional budget. A. A zero based budget doe
Oksana_A [137]

Answer:

B. The zero based budget requires managers to re-justify every planned expenditure every year.

Explanation:

A zero based budget is one that does not take into account historical data when it is considering the present year budget. Each departmental requirement is re-evaluated and a new amount is assigned as budget for the year.

However conventional budgets carryover the previous year's expenses as a base data point. This results in similar budgeting across years.

So the main difference between the two is that zero based budget requires managers to re-justify every planned expenditure every year.

8 0
3 years ago
Performing quality assurance is a subprocess of the _____ process of project quality management. a. initiating b. monitoring and
puteri [66]

Answer:

d. executing

Explanation:

Quality Management in Project Management implies the elaboration of a quality plan for the creation of the product, taking into account the scope of the project and the requirements of the interested parties.

This area has three processes, as exposed in the PMBOK Guide prepared by the Project Management Institute (PMI):

Quality management planning

Carrying out quality assurance

Quality control

Quality management planning is placed in the group of planning processes; quality assurance is placed in the execution process group; and quality control is in the group of monitoring and control processes.

The Quality Management deliverables are as follows: quality management plan, process improvement plan, quality metrics, quality checklists, quality control measures, validated changes, and verified deliverables

7 0
3 years ago
A(n) ________ indicates the decision variables set by the buyer, such as product availability, the backup stock needed to provid
Anestetic [448]

Answer:

Inventory Management Report

Explanation:

Inventory management is the most essential part of every organization where an organization manages its raw material, check their availability of a product, back storage so that company doesn't get a shortage of its product and the quantities. On the other hand inventory management report indicates the strong decision variables are set by the buyers.

Therefore from the above explanation, the correct answer is an inventory management report.

4 0
3 years ago
The write-off of intangible assets is called
myrzilka [38]
The answer to this question is:

<span>The write-off of intangible assets is called?
</span>C-"Amortization."

Hoped This Helped, <span> Awifeamother
Your Welcome :) </span>
7 0
3 years ago
Read 2 more answers
As of January 1, Year 2, Room Designs Inc. had a balance of $9,900 in Cash, $3,500 in Common Stock, and $6,400 in Retained Earni
dexar [7]

Answer:

What did the company purchase that resulted in the cash outflow from investing activities?

It purchases Land for 16,500

Explanation:

The investing activities outflow will be for the purchase of long tem assets in cash.

The complete cash outflow for investing activities is explain it through the land account:

cash outflow: 16,500

land:               16,500

There are no other long-term assets which can explain the variance plus, the land account covers the amount entirely.

6 0
2 years ago
Other questions:
  • Which form of currency is not backed by gold today? The form of currency no longer backed by gold is called money
    10·1 answer
  • I WILL MARK THE BRAINLIEST
    6·1 answer
  • In computing depreciation, salvage value is a. The fair value of a plant asset on the date of acquisition. B. Subtracted from ac
    13·1 answer
  • Ratchet Manufacturing anticipates total sales for August, September, and October of $200,000, $210,000, and $220,500 respectivel
    12·1 answer
  • At September ​24, 2016​, how much in total did customers owe Bullock​? How much did Bullock expect to collect and not to collect
    11·1 answer
  • Sherri is a self- employed house painter. she has no regular office, and she does not have a qualified office in her home. there
    12·1 answer
  • During the current year, East Corporation had 4 million shares of common stock outstanding. 2,200, 4% convertible bonds, each wi
    13·1 answer
  • Which of the following statements is CORRECT? a. If two firms differ only in their use of debt—i.e., they have identical assets,
    10·1 answer
  • Big Cat Exploration erected an oil platform in a remote area of Texas at a cost of $10 million. Bit Cat is legally required to d
    6·1 answer
  • Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 y
    10·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!