Question

(i) The current stock price is 100. The call option premium with a strike price 100 is 8. The effective risk-free interest rate is 2%. The stock pays no dividend. What is the price of a put option with strike price 100? (Both options mature in 3 months.)

(ii) The 3-month forward price is 50. The put option premium with a strike price 52 is 3 and the put option matures in 3 months. The risk-free interest rate is 4% p.a., compounded quarterly. The stock pays no dividend. What is the price of a call option with a strike of 52 and matures in 3 months?

(iii) What are the reasons to not hedge?

A. Distress costs
B. Costs of monitoring
C. Taxes
D. Risk Aversion

Answer 1

Answer :-

iii ) :-

Hedge :-

Fence bookkeeping is a technique for bookkeeping where passages for the responsibility for security and the contradicting support are treated as one. Fence bookkeeping endeavors to lessen the unpredictability made by the rehashed change of a money related instrument's esteem, known as stamping to showcase. This diminished instability is finished by consolidating the instrument and the support as one passage, which counterbalances the restricting developments.

So , the answer is Option ( B ) .  Costs of monitoring