Problem 2. You want to buy a forward start option on a stock index S which,...

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Problem 2. You want to buy a forward start option on a stock index S which, on the forward start date 9 months from today, will give you one 6-month to expiration call option with strike price equal to 95% of the price of the underlying on the forward start date (i.e. the six month call option is issued with the strike price equal to 0.95 S0.75). You are given that that S = 100, = 0.26, r = 0.05, = 0.02. We may assume that the values for r, and 8 remain the same over the next 9 months. (1) [7 points] Compute the price of the forward start option at time 0. (2) [3 points] If you are the market maker that writes this forward start option how would you hedge your position? Problem 2. You want to buy a forward start option on a stock index S which, on the forward start date 9 months from today, will give you one 6-month to expiration call option with strike price equal to 95% of the price of the underlying on the forward start date (i.e. the six month call option is issued with the strike price equal to 0.95 S0.75). You are given that that S = 100, = 0.26, r = 0.05, = 0.02. We may assume that the values for r, and 8 remain the same over the next 9 months. (1) [7 points] Compute the price of the forward start option at time 0. (2) [3 points] If you are the market maker that writes this forward start option how would you hedge your position?

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Answer Okay lets solve the quantitative questions from the provided information Question 1i What mus... View the full answer