In March 2007, a four-month call on the stock of Amazon.com, with an exercise price of $40.00, sold for $2.85. The stock price was $39. The risk-free interest rate was 5.3%.
a. What much should a put sell for?
b. Suppose a $1.00 change in the stock results in a $.40 change in the call and a one month time passage decreases the call price by $.50. How could you use the call to perfectly hedge a long stock position in Amazon? What would be the amount of your investment in this position?
c. What would be your dollar gain or loss in one month if the stock priced increased by $1 or decreased by $1.
d. How could you hedge with the put?