Skip to content

CMA Final · Strategic Financial Management · Options

Shares of Sutlej Ltd. trade at ₹100. In a one-period binomial model the price will either rise to ₹120 or fall to ₹90. A call option has a strike of ₹105. What is the hedge ratio (delta) of the call, i.e., number of shares needed to replicate one call?

The delta is 0.50. The call pays ₹15 in the up state and zero in the down state, while the share price spread is ₹30 (120 minus 90), so the replicating portfolio holds 15 divided by 30, which is 0.5 shares per call.

  1. A0.50Correct
  2. B0.30
  3. C0.50 shares short
  4. D1.00

Explanation

Call payoffs: up = 120 - 105 = 15; down = 0. Delta = (15 - 0)/(120 - 90) = 0.50. Option 0.30 wrongly divides by 50; 1.00 assumes the full upside is captured; the short option confuses the direction since replicating a long call needs long shares.

Did you get it right without looking?

One question tells you little. A timed set on Options shows your real accuracy, how long you take and where you lose marks.

Practise OptionsFree diagnostic mock

More Options questions