For a call option,the rate of increase in the share price is 2%,while the rate of decrease in the share price is 1%.If the share price increases,the call price is $10.10,while the call price will be $9.95 if the share price decreases.Given this information,and that the asset price is currently $10.00 and the risk-free rate is 5% p.a. ,calculate the risk-free hedge ratio.

A) $ 0.10 $
B) $ 0.15 $
C) $ 0.17 $
D) $ 0.20 $

Question

For a call option,the rate of increase in the share price is 2%,while the rate of decrease in the share price is 1%.If the share price increases,the call price is $10.10,while the call price will be $9.95 if the share price decreases.Given this information,and that the asset price is currently $10.00 and the risk-free rate is 5% p.a. ,calculate the risk-free hedge ratio.

A) $ 0.10 $
B) $ 0.15 $
C) $ 0.17 $
D) $ 0.20 $

Quizplus · Accepted Answer

Using equation 16.18,we can calculate the risk-free hedge ratio as follows: hedge ratio = (10.10 - 9.95)/[(0.02 - 0.01)10] = (0.15)/1 = 0.15.

For a Call Option,the Rate of Increase in the Share 0.10 0.10 0.10

For a Call Option,the Rate of Increase in the Share $0.10$