A client approaches a dealer to buy 1,000 call options with strike 102 and maturity 0.25 years.
Question:
A client approaches a dealer to buy 1,000 call options with strike 102 and maturity 0.25 years. The asset is a non-dividend paying stock with spot is 100 and continuously compounded risk free interest rates are 2.50%. The dealer knows that at maturity the stock will either be 105 or 95.
The dealer prices the option as follows:
The dealer determines that the option price is 1.1748 and the delta on the option is 0.3000. He sells the options at 1.2248 per option.
In order to set up a risk-less portfolio how many shares does he buy or sell (enter a negative number if he sells)?
How much cash will he generate in setting up this portfolio (enter a positive number if he generates cash and negative if he needs to borrow it, give your answer to two decimal places)?
Financial and Managerial Accounting
ISBN: 978-0538480895
11th Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren