The delta of a call option on a firm's assets is .408. By how much will a $220,000 project increase the value of equity?
A) $89,760
B) $71,622
C) $309,760
D) $130,240
E) $539,216

Question

Quizplus · Accepted Answer

The delta of a call option measures the sensitivity of the option price with respect to changes in the underlying asset price. In this case, a delta of .408 implies that the call option price will increase by $0.408 for every $1 increase in the value of the underlying asset.

If a $220,000 project increases the value of equity by x, then the increase in the value of the underlying asset will be x / 0.408. Setting this equal to $220,000, we get:

x / 0.408 = $220,000

x = $89,760

Therefore, the project will increase the value of equity by $89,760.

The Delta of a Call Option on a Firm's Assets