Question

calculate the elasticity of a call option with a premium of $5.00 and a strike price of $69. the call has a hedge ratio of 0.7, and the underlying stock's price is currently $35. (round your answer to 2 decimal places.) elasticity of the call %

Answer 1

The elasticity of the call option in question, given a hedge ratio of 0.7, stock price of $35 and option premium of $5, is calculated to be 4.90.

Step-by-step explanation:

The elasticity of a call option is calculated using the formula Elasticity = (%DeltaOption/%DeltaStock) * (Stock/Option). In other words, it's the relative change in option price per absolute change in stock price multiplied by the relative price of the stock to the option.

In this case, the hedge ratio or (delta), is given as 0.7. This is the %DeltaOption/%DeltaStock. The stock price is $35 and the option premium is $5.00. Thus, the Elasticity of the call option can be calculated as follows:

Elasticity = (0.7) * (35/5) = 4.9

So, the elasticity of this call option is 4.9 or rounded to 2 decimal places, we get 4.90.

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