Calculate the hedge ratio for the following: call option with exercise price of $10.40,current share price of $9.80 and an expected price at the expiry of the option of either $9.60 or $11.00.

Question

Quizplus · Accepted Answer

To calculate the hedge ratio, we need to determine the slope of the line connecting the two possible values of the stock price at expiration (i.e., $9.60 and $11.00) and the corresponding option prices.

Option price when stock price is $9.60: 
=$0 (since the option will not be exercised as the stock price is lower than the exercise price)

Option price when stock price is $11.00:
=$0.60 (=$11.00-$10.40)

Hence, the slope of the line is:
=(0.6 - 0) / (11.00 - 9.60)
=0.6 / 1.4
=3 / 7

Therefore, the hedge ratio is 3/7 or C.

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