The Current Share Price of Alcoa Is $70 and the Share

question 17

Multiple Choice

The current share price of Alcoa is $70 and the share does not pay dividends. The instantaneous risk free rate of return is 6%. The instantaneous standard deviation of Alcoa's shares is 40%. A put option on this share with an exercise price of $75 and an expiration date 30 days from now. According to the Black-Scholes OPM, you should hold ________ shares of stock per 100 put options to hedge your risk.

• A)30
• B)34
• C)69
• D)74

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Definitions:

Test Statistic

A value calculated from sample data that is used in a hypothesis test to determine whether to reject the null hypothesis.

Rejection Region

The range of values for which the null hypothesis is considered not probable and is therefore rejected in a hypothesis test.

Sign Test

A nonparametric test used to determine if there is a difference between matched or paired observations.

Distribution

Refers to the way in which data points are spread out across the range of possible values in a dataset.