Question
5. The Black-Scholes price of an option works out to be $13.43 which matches the market price. In the process of calculating this price, we
5. The Black-Scholes price of an option works out to be $13.43 which matches the market price. In the process of calculating this price, we find that N(d1)=0.5636 and N(d2)=0.4602. If the underlying stock price is $125.94, what would be the cumulative cost of hedging a sale of 500 naked calls? Include in your cumulative cost the cash inflow from the sale of the options.
6. A firm needs to borrow $20 million in 30 days at 90-day LIBOR+1%. The loan will be paid back with principal and interest 90 days later. The firm is concerned about interest rate risk over this 30-day period, and purchases an FRA to protect against an increase in LIBOR. The rate on 30-day FRAs based on 90-day LIBOR is 5%. Interest on the loan and FRA is based on 90/360. Suppose that 30 days later LIBOR is 6%. What is the payoff of the FRA?
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