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Corporate Finance · End Term · 13 Apr 2025 · January 2025 term

Question 32: The current price of a non-dividend-paying stock is Rs 6…

Question 32

+4 marksOne or more correct options

The current price of a non-dividend-paying stock is Rs 60. Over the next three months, it is expected to rise to Rs 70 or fall to Rs 50. Assume the risk-free rate is zero. A three-month call option with a strike price of Rs 65 is trading at Rs 5. Select the correct statements based on the given information.

Select all that apply.

  1. A

    The hedge ratio for the given call option is 0.25.

  2. B

    If share price changes by Rs 1, the call option price changes by Rs 0.5.

  3. C

    The purchase of one share can be hedged with 4 call options.

  4. D

    The purchase of one share can be hedged with 2 call options.

Show answer

Correct answers

  • A

    The hedge ratio for the given call option is 0.25.

  • C

    The purchase of one share can be hedged with 4 call options.

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Question 32 of 35 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 13 Apr 2025, in the January 2025 term (IIT M IMPROVEMENT AN EXAM QIM3 13 Apr 2025). It carries 4 marks.

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