Question #93

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 44

Status: Unattempted

Correct Answer: A

Part of Context Group: Q93-95 First in Group
Shared Context
- Given the information regarding the various Reston stock options, which option will increase the most relative to an increase in the underlying Reston stock price? A) European call. B) American put. C) American call.
Question
Fairfax would like to consider neutralizing his Reston equity position from changes in the stock price of Reston. Using the information in Table 3 how many standard Reston European options would have to be either bought or sold in order to create a delta neutral portfolio?
Answer Choices:
A. Sell 334,616 put options
B. Buy 300,703 put options
C. Sell 334,616 call options
Explanation
Number of call options = (Reston Portfolio Value / Stock PriceReston)(1 / Deltacall). Number of call options = ($10,000,000 / $50.00/sh)(1 / 0.5977) = 334,616.
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