Repeat the previous problem, except that instead of hedging volatility risk, you wish to hedge interest rate
Question:
In Previous problem
You have purchased a 40-strike call with 91 days to expiration. You wish to deltahedge, but you are also concerned about changes in volatility; thus, you want to vega-hedge your position as well.
a. Compute and graph the 1-day holding period profit if you delta- and vegahedge this position using the stock and a 40-strike call with 180 days to expiration.
b. Compute and graph the 1-day holding period profit if you delta-, gamma-, and vega-hedge this position using the stock, a 40-strike call with 180 days to expiration, and a 45-strike put with 365 days to expiration.
Step by Step Answer:
We purchased a 91day 40strike call denoted option 1 a Using a 180day 40strike call option 2 to deltarho hedge we must write 5064 of these options and ...View the full answer
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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