Lori is a new hire and is keen to show her prowess in delta hedging to her
Question:
Lori is a new hire and is keen to show her prowess in delta hedging to her boss. She reviews the
put options on Waste Connections Ltd. and sells 60,000 put options.
Spot price on the date of trading is 105$. Strike price is 95$. Risk Free rate is 5%, standard
deviation is 22% and time is 12 weeks
(a) Determine the call and put premium? (3 marks)
(b) How many shares should Lori buy/sell to delta hedge the portfolio? (2 marks)
(c) 4 weeks later, Lori reviews the delta hedge strategy and finds the stock price of Waste
Connections has fallen to 94$, how many shares should Lori buy/sell to delta hedge
the portfolio now? (3 marks)
(d) Given the strike, spot and delta levels at initiation, how do you think gamma will
behave? Will it be high or low? And given what happens after 4 weeks, will gamma
be higher or lower than what it was at initiation.
Expert Answer:
a To determine the call and put premium we can use the BlackScholes option pricing model The formulas for call and put premiums are as follows Call Premium S Nd1 X ert Nd2 Put Premium X ert Nd2 S Nd1 ... View the full answer
