Covered call writers often plan to buy back the written call if the stock price drops sufficiently.
Question:
a. Explain in general how this buy-back strategy could be implemented using barrier options.
b. Suppose S = $50, σ = 0.3, r = 0.08, t = 1, and δ = 0. The premium of a written call with a $50 strike is $7.856. We intend to buy the option back if the stock hits $45. What is the net premium of this strategy?
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