Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

An investor buys a put and a call on a stock. Currently the stock is trading at $50 and the volatility of stock is 25%.

An investor buys a put and a call on a stock. Currently the stock is trading at $50 and the volatility of stock is 25%. The strike price of the both the put and call is $50. The options expire in 3 months and the risk free rate is 1%.

N(0.0825)= 0.532875

N(-0.0825)= 0.467125

N(-0.0175)= 0.493019

N(0.0175)= 0.506981

N(0.1825)= 0.572405

N(0.1825)= 0.427595

N(-0.0425)= 0.48305

N(0.0425)= 0.51695

N(-0.1425)= 0.443343

N(0.1425)= 0.556657

N(0.0575)= 0.522927

N(-0.0575)= 0.477073

N(0.3963)= 0.654045

N(-0.3963)= 0.345955

N(0.2963)= 0.616486

N(-0.2963)= 0.383514

N(0.4963)= 0.690147

N(-0.4963)= 0.309853

N(0.2713) 0.606907

N(-0.2713)= 0.393093

N(0.1713) 0.567993

N(-0.1713)= 0.432007

N(0.3713) 0.64478

N(-0.3713)= 0.35522

a.What is the delta of the portfolio?

b.What is the gain or loss on the portfolio is the stock price increases by $2?

c.Is delta hedging sufficient to hedge the portfolio in (a)? Explain your answer

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

Financial and Management Accounting

Authors: Pauline Weetman

7th edition

1292086599, 978-1292086590

More Books

Students also viewed these Finance questions

Question

define relevant and irrelevant costs and revenues; LO1

Answered: 1 week ago