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Basic Question 5 of 9
Continue with the previous question. A stock is worth $60 today. In a year the stock price can rise or fall by 15 percent. The interest rate is 6%. A put option expires in two years and has an exercise price of $60. What is the number of shares needed to construct a risk-free hedge at each point in the binomial tree? Use 10,000 puts.
User Contributed Comments 2
| User | Comment |
|---|---|
| Rotigga | n+ = (1.35 - 0) / (79.35 - 58.65) = 0.06522; therefore 652 shares n- = (16.65 - 1.35) / (58.65 - 43.35) = 1; therefore 10,000 shares n0 = (5.60 - 0.38) / (69 - 51) = 0.29; therefore 2,900 shares |
| gregsob2 | Yep agree with rotigga |
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Learning Outcome Statements
calculate and interpret the value of an interest rate option using a two-period binomial model;
CFA® 2026 Level II Curriculum, Volume 5, Module 32.