A market-maker sells 1,000 1-year European gap call options, and delta-hedges the position with shares. You are

Question:

A market-maker sells 1,000 1-year European gap call options, and delta-hedges the position with shares.

You are given:

(i) Each gap call option is written on 1 share of a nondividend-paying stock.

(ii) The current price of the stock is 100.

(iii) The stock’s volatility is 100%.

(iv) Each gap call option has a strike price of 130.

(v) Each gap call option has a payment trigger of 100.

(vi) The risk-free interest rate is 0%.

Under the Black-Scholes framework, determine the initial number of shares in the deltahedge.

(A) 586

(B) 594

(D) 692

(E) 797

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Derivative Pricing

ISBN: 9780367734213

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Authors: Ambrose Lo

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Question Posted: Nov 24, 2023 10:31 PM

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A market-maker sells 1,000 1-year European gap call options, and delta-hedges the position with shares. You are

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A gap Because the marketmakers delta is 1000AP heshe requires 1 0004 sh...View the full answer

Derivative Pricing

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