CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

Assume a stock price is $50 and that in the next year it will either rise by 20% or fall by 10%. The risk-free interest rate is 6%. A put option on this stock has an exercise price of $50. If we use a one-period binomial model, what should be the hedge ratio?
A. -0.33
B. 0.5333
C. 1.89
Explanation: μ = 1.2 and d = 0.9
S+ = 50 x 1.2 = 60
S- = 50 x 0.9 = 45
p+ = Max (0, 50 - 60) = 0
p- = Max (0, 50 - 45) = 5
n = (p+ - p-) /(S+ - S-) = -0.333

User Contributed Comments 3

User Comment
frankal101 the delta for a put must be negative, so the numerator of the hedge ratio will be negative... A is the only negative answer...

kinda of a roundabout way to answer, but hey if it saves you 1.5 minutes on the exam its well worth it...
dblueroom does that mean the number of stock to short?
ljamieson hedge ratio ~ delta: dc/dS
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