Consider the portfolio of a put option with the following:

s(0)=52.02, k=50, t(in days)= 94, price = 2.02.

a) Compute the overall portfolio Greeks. [5 marks]

b) Simulate 100 days of stock returns. The returns should come from a normal distribution with mean zero and volatility equal to 25%. [5 marks]

c) For each day, reprice the entire portfolio of options and compute the Black, Scholes and Merton Greeks. [5 marks]

d) For each day, compute the return on a delta hedged option position. [5 marks]

e) For each day, compute the return on a delta and gamma hedged option position.

f) Discuss your results. [5 marks]

Answer rating: 100% (QA)

Solution a The overall portfolio Greeks can be computed as follows Delta 05202 050 02601 Gamma 05202 ... View the full answer