You hold one share of IBM stock. The current stock price is $56. You are worried...

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You hold one share of IBM stock. The current stock price is $56.You are worried that the stock price may decline. Your objective isto get at least $50 from the stock at the end of one year. Assumethe volatility of IBM stock (sigma) is 30% and the risk-free rateis 8%. (i) How will you hedge using put option on IBM stock to makesure that you receive at least $50 at the end of the year? (ii)Suppose put option on IBM stock is not available. How can youcreate a portfolio using only IBM stocks and a risk-free bond thathas exactly same payoff as the portfolio in (a) at the end of theyear? [Hint: You need to use Black-Scholes formula for put option.Calculate d1 and d2 (show your calculations). Then, use N(d1) =0.79and N(d2)=0.69].

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i To hedge we buy a put option with strike price of 50 We use BlackScholes Model to calculate the value of the put option today The value of a put option is P K ertNd2 S0Nd1 where S0 current spot price K strike price Nx is the cumulative normal distribution See Answer

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You hold one share of IBM stock. The current stock price is $56.You are worried that the stock price may decline. Your objective isto get at least $50 from the stock at the end of one year. Assumethe volatility of IBM stock (sigma) is 30% and the risk-free rateis 8%. (i) How will you hedge using put option on IBM stock to makesure that you receive at least $50 at the end of the year? (ii)Suppose put option on IBM stock is not available. How can youcreate a portfolio using only IBM stocks and a risk-free bond thathas exactly same payoff as the portfolio in (a) at the end of theyear? [Hint: You need to use Black-Scholes formula for put option.Calculate d1 and d2 (show your calculations). Then, use N(d1) =0.79and N(d2)=0.69].