Answer:
The Elasticity of the call option = [tex]\mathbf{ 5.06 \%}[/tex]
Explanation:
From the given information:
For $1 change in stock price
the percentage of change in stock price = ΔS/S
ΔS/S = (1× 100)/47 = 2.127659574
ΔC = hedge ratio × ΔS
ΔC = 0.7 × 1
ΔC = 0.7
However , the percentage change in the stock call option price = ΔC/C
= (0.7 × 100) / 6.50
= 70/6.50
= 10.76923077
∴
The Elasticity of the call option = [tex]\mathbf{\dfrac{percentage \ change \ in \ the \stock \ call \ option \ price }{percentage \ change \ in \ the \ stock \ price}}[/tex]
The Elasticity of the call option = [tex]\mathbf{ \dfrac{10.76923077 }{2.127659574}}[/tex]
The Elasticity of the call option = [tex]\mathbf{ 5.06 \%}[/tex]
OR
The Price Elasticity of the call option can be computed by using EXCEL FUNCTION(=B3*(B4/B1))
The illustration to that can be seen in the diagram attached below.
The Elasticity of the call option [tex]\simeq[/tex] 5.06% by using EXCEL FUNCTION.
