Kwang Chen Bodie Essentials of Invesments 10e Prebuilt Instr

Kwang Chen Bodie, Essentials of Invesments, 10e- Prebuilt Instructor Course: Bodie, Essentials of Investments, 10e-Prebuilt Instructor Course FINANCE 6 Homework instructions Ih Question 3 (of 10) Save &Exit; Subn 10.00 points A collar is established by buying a share of stock for $63, buying a six-month put option with exercise price $56, and writing a sik-month call option with exercise price $70. Based on volatility of the stock, you calculate that for an exercise price of $56 and maturity of six months, Nidi) 0.7300 whereas for the exercise price of $70, Md0.6516 What will be the gain or loss on the collar if the stock price increases by $1? (Input the amount as a positive value. Round your answer to 3 decimal places.) Click to select) of $

Solution

Computation of delta

Delta = 1 - Short call + Long Put

Delta = 1 - [N(d1)] + [ N(d1) - 1]

Delta = 1 - [0.6516] + [ 0.73 - 1]

Delta = 0.078

If the stock price increases by $1, the value of the collar increases by $.0.078. The stock will be worth $1 more, the loss on the short put is $0.73, and the call written is a liability that increases by $0.6516