Chapter 9

(5) You own four lots (each lot is 1,000 shares) of Syarikat ABC stock currently selling at RM
5.25. THE following options are available.
RM 5.00 call @ .45
RM 5.00 put @ .10
Assume the RM 5.00 call has a delta of 0.80.
State how you would hedge your stock portfolio. How many of the options would you use?
(6)ANZÄC stock is now trading at RM 19.00. The stock has a price volatility (standard
deviation) Cf 30%, and js expected to pay a dividend of RM 3.00 in 30 days. Determine the
correct value call option on the stock given the following information. Maturity = 90 days
Interest rate (rt) = 12%
Exercise price = RM 15.00

(7) Re-do question (6) assuming the option is a put option. What is its value? Briefly
explain put value is lower than that of the call option in question (6).

Guideline Answer
Q5) LS+Lp=LC
HR=1/delta
Call delta=0.8; put delta = 1-0.8=0.2
HR=1/0.2=5

Four lots of stocks will need to have 4*5=20 put options for the hedging

Q6) PV of d =3/(1+r)t=3/(1.12)30/360=2.97
d1=0.7177 ; N(d1)=0.7642
d2= 0.5677; N(d2)= 0.7157

S new= 19-2.97=16.03 (SP > XP)

C=1.83 (ITM), so higher premium

Q7)N(-d1)= 1-0.7642= 0.2358; N(-d2)=1-0.7157=0.2843

Put = 0.36 (OTM), so low premium.

P IV = XP - SP
Q15: a)

Call value path Call payoff

Put payoff

RM13.31 Cuuu RM3.31

0
0.6
0.6 RM12.1 Cuud
0.4
RM10.89 Cudu RM0.89 0
0.6 RM11 0.4 Cduu
0.6
RM10 RM9.9
0.6 0.4 Cudd 0 1.09
0.4 RM 9 0.6 RM8.91 Cdud
0.4
RM8.1 Cddu
0.4 2.71
RM7.29 Cddd 0

Call price = 0.216x3.31+0.1440x3x0.89 =RM9

(1+0.08/3)³

b) Put price = 0.096x3x1.09+0.064x2.71=RM00.45

(1+0.08/3)³
Because both call and put options are different in value as higher bullish probability is more
favorable to call option than put option.

c) Higher the volatility of underlying asset price, higher the call and put option prices. Since the
quoted call option price is higher than price derived using BSOPM, it means that implied
volatility from the quoted price is much higher than the historical volatility we had used.