Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

ABC is currently trading at $77 per share. Your previous calculation of the historical volatility for ABC indicated an annual standard deviation of return of

ABC is currently trading at $77 per share. Your previous calculation of the historical volatility for ABC indicated an annual standard deviation of return of 20 percent; but examining the implied volatility of several ABC options reveals an increase in annual volatility to 30 percent.

There are two traded options series that expire in 360 days as show in the following table:

X = 75 X = 80

Call Put Call Put

DELTA 0.6674 -0.3326 0.574 -0.426

GAMMA 0.0176 0.0176 0.019 0.019

The options have $75 and $80 strike prices respectively. The current risk-free interest rate is 3 percent per annum, and you hold 5,000 shares of ABC.

Construct a portfolio that is DELTA - and GAMMA - neutral using the call options written on ABC. Show all calculations.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance: An Introduction To Accounting And Financial Management

Authors: Louis Gapenski

6th Edition

1567937411, 978-1567937411

More Books

Students also viewed these Finance questions

Question

Describe what is meant by management by exception. (p. 10)

Answered: 1 week ago