Suppose Disney's stock price is currently $100. In the next six months it will either fall...

Question

Question

Suppose Disneys stock price is currently $100. In the next six months it will either fall to $80 or rise to $120. What is th

Answer 1

Answer #1

The stock price today is $100, At the end of the year, stock price will be either $120 or $80.

If the stock price increase to $120, put option will not be exercised so payoff = 0

If the stock price decreases to $80, put option will pay $20

The hedge ratio (ratio of put option payoffs to stock payoffs)

= (0-20)/(120-80) = -20/40 = -0.5

So, 2nd option is correct.

Answer 2

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