Question

consider a six month put option on a stock with a strike price of $32. the current stock price is $30 and over the next six months it is expected to rise to $36 or fall to $27. the risk-free interest rate is 6% per annum, compounded continuously. what position in the stock is necessary to hedge a long position in 1 put option?

Answer 1

To hedge a long position in 1 put option, you need to take a short position in the stock.

Step-by-step explanation:

To hedge a long position in 1 put option, you need to take a short position in the stock. The number of shares to short can be calculated using the put-call parity formula:

(Number of shares to short) = (Number of put options) ˣ (Strike price) / (Stock price)

In this case, since the stock price is $30 and the strike price is $32, the number of shares to short would be:

(Number of shares to short) = 1 ˣ $32 / $30 = 1.0667

Therefore, you would need to short approximately 1.067 shares of the stock to hedge a long position in 1 put option.