Question

The interest rate is 2% per year. the stock price of ilw is currently $85 and it pays no dividends. the stock price a year from now will either be $110 or $70. you sell your client a call option on ilw with a strike price of $90 and an expiration date 1 year from now. what is the hedge ratio of this call option?

Answer 1

The hedge ratio of this call option is approximately 0.2381 or 23.81%.

Step-by-step explanation:

The hedge ratio of a call option is calculated by dividing the change in the option price by the change in the stock price. In this case, the stock price can either increase to $110 or decrease to $70 after one year. The strike price of the call option is $90. To calculate the hedge ratio, we need to determine the change in the option price for a $1 change in the stock price.

If the stock price increases by $1 to $111, the option price will increase from $21 to $31. If the stock price decreases by $1 to $69, the option price will decrease from $21 to $0. Therefore, the change in the option price for a $1 change in the stock price is $10.

Now we can calculate the hedge ratio by dividing the change in the option price ($10) by the change in the stock price ($111 - $69 = $42). The hedge ratio is approximately 0.2381 or 23.81%.