Consider a Black-Scholes market, where we have written a Eu- ropean 160-strike call option with a...
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Consider a Black-Scholes market, where we have written a Eu- ropean 160-strike call option with a 1-year expiration date on a non-dividend paying stock with So= 135 and a = 0.25. We want to Delta-Gamma hedge this option using a European 140-Strike call option with maturity in 2 years. Call Call 160 140 1 2 6.11404 19.15407 0.31754 0.57419 Gamma 0.01056 0.00821 Strike Maturity Price Delta The continuous compounding risk-free interest rate is 2%. (a) Compute the Delta-Gamma hedge position for writing the 160-strike call option and hedging it with the 140-strike call option. What is the bank balance of the hedged portfolio at t=0? (b) In 3 months we take another look at the hedge. Suppose the stock price has decreased to $130. What is the profit or loss made on the hedged portfolio at this time point? Make sure to account for interest income or expenses. Consider a Black-Scholes market, where we have written a Eu- ropean 160-strike call option with a 1-year expiration date on a non-dividend paying stock with So= 135 and a = 0.25. We want to Delta-Gamma hedge this option using a European 140-Strike call option with maturity in 2 years. Call Call 160 140 1 2 6.11404 19.15407 0.31754 0.57419 Gamma 0.01056 0.00821 Strike Maturity Price Delta The continuous compounding risk-free interest rate is 2%. (a) Compute the Delta-Gamma hedge position for writing the 160-strike call option and hedging it with the 140-strike call option. What is the bank balance of the hedged portfolio at t=0? (b) In 3 months we take another look at the hedge. Suppose the stock price has decreased to $130. What is the profit or loss made on the hedged portfolio at this time point? Make sure to account for interest income or expenses.
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a To Delta hedge the 160 call Sell 160 031754 contracts of the ... View the full answer
Related Book For
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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