An investment bank has written a number, N, of European call options on a nondividend paying stock with strike price R300, current stock price R200, time to expiry of 3 years and an assumed continuously compounded interest rate of 8 pa The bank is deltahedging the option position assuming the BlackScholes framework9 holds and currently holds 66,500 shares of the stock and is short R 5,000 000 in cash (ii) By using the hedging position and the BlackScholes formula for the value of the option, derive two equations satisfied by N and , the banks assumed volatility 2 (iii) Estimate by interpolation 6 (iv) Deduce the value of N 2

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Solution If the bank has a deltahedged position then the tota... View the full answer