Strike price = |
65 | ||||
Upside value = |
75 | ||||
Downside value = |
25 | ||||
VC at upper = Upper value - Strike price (subject to 0) |
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75 - 65 = | 10 | ||||
VC at down |
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25 - 65 = 0 (it cannot be negative) |
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Hedge ratio = (V.C. at Upper value -V.C. at Down value) / (Upper Value - Down value) |
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(10-0) /(75 - 25) |
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0.2 | |||||
Hedge ratio is 0.2. It means if one share is long then 0.20 call should be short. |
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Formula for no. of shares buy = no. of call options/Hedge ratio |
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so no.of shares buy should be = 100/0.20 |
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500 | |||||
So, 500 shares should be bought to create riskless portfolio. |
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