Chapter 26 - Options Pricing
433

Section 26.1.1

The Hedge Ratio on Discovery Cafe is 1:3. JQ's fully hedged portfolio requires three written calls to offset the price movement of the shares. The Hedge ratio is calculated as:

1  =  Price range on the stock  =  S+ - S-  =  S+ - S-
----- -------------------------- ------------ ------------
Δ Value range on the option C+ - C- (S+ - X) - 0

Example 2:

1  =  S+ - S-  =  $100 - $25  = 3 
----- ------------ ------------------
Δ S+ - X) ($100 $75) - $0

445 Question 26-6 D should read "What premium should you be willing to pay for the 91 day $90 put option.