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:

Perfectly Elastic Demand

Perfectly elastic demand is a market scenario where the demand for a product can drastically change (increase or decrease) at the slightest change in price, essentially to infinity.

Patents

Legal documents granted by the government giving an inventor exclusive rights to manufacture, use, or sell an invention for a certain number of years.

Innovation Incentives

Mechanisms or policies designed to encourage the development and implementation of new ideas, products, or methodologies.

Monopoly Power

The degree of control a company has over a market, enabling it to set prices or exclude competition.