Calculate the hedge ratio for the following: call option with exercise price of $3.20,current share price of $3.10 and an expected price at the expiry of the option of either $3.40 or $2.80.

Question

Quizplus · Accepted Answer

The hedge ratio, also known as the delta, for a call option can be calculated as the change in the option's price divided by the change in the underlying asset's price. Here, if the share price goes up to $3.40, the call option with an exercise price of $3.20 will be worth $0.20 ($3.40 - $3.20). If the share price goes down to $2.80, the call option will be worthless ($0.00) because it's out of the money. The change in the option's price is $0.20 - $0.00 = $0.20, and the change in the share price is $3.40 - $2.80 = $0.60. Therefore, the hedge ratio is $0.20 / $0.60 = 1/3.

Calculate the Hedge Ratio for the Following: Call Option with Exercise