You are given that S (7) is the time-t stock price. S(t) satisfies...
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You are given that • S (7) is the time-t stock price. • • S(t) satisfies the SDE: ds (t) = 0.25S (1)+0.45S (1)dz (1), S (0)= 60 The stocks pays dividend continuously at a rate proportional to its price. The dividend yield is 4%. The continuously compounded risk-free interest rate is 10%. Justin has just bought 100 unit of 9-month 60strike put option. To hedge the risk. Justin immediately hedges his position by purchasing the hedge portfolio. a. Calculate the components in Justin's hedge portfolio at 1 = 0. b. Suppose that the stock price after 1 month is 65, compute the profit and loss of owing 100 units of put; Justin's position, assuming that Justin uses the stock dividend to purchase extra shares, and that Justin can borrow or lend at the risk-free interest rate. i. ii. You are given that • S (7) is the time-t stock price. • • S(t) satisfies the SDE: ds (t) = 0.25S (1)+0.45S (1)dz (1), S (0)= 60 The stocks pays dividend continuously at a rate proportional to its price. The dividend yield is 4%. The continuously compounded risk-free interest rate is 10%. Justin has just bought 100 unit of 9-month 60strike put option. To hedge the risk. Justin immediately hedges his position by purchasing the hedge portfolio. a. Calculate the components in Justin's hedge portfolio at 1 = 0. b. Suppose that the stock price after 1 month is 65, compute the profit and loss of owing 100 units of put; Justin's position, assuming that Justin uses the stock dividend to purchase extra shares, and that Justin can borrow or lend at the risk-free interest rate. i. ii.
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To calculate the components in Justins hedge portfolio at t0 we need to use the concept of delta hed... View the full answer
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