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Attempt all problems If you need to make an assumption to complete a calculation be explicit about what it is Q3) (15 Points) A trader

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Attempt all problems If you need to make an assumption to complete a calculation be explicit about what it is Q3) (15 Points) A trader holds the following portfolio of options. All of the following apply to each option: value is based on Black Scholes model, 1 year to maturity, annual risk free rate is 2%, dividends are 0 and the stock trades at 100. Assume continuous compounding. Long 100 Calls: Volatility = 20%, Strike 100 Short 100 Puts: Volatility = 30%, Strike 90 Short 50 Calls: Volatility = 35%, Strike 120 a) The trader wants to hedge and the only instrument available to do that is the stock. You are the risk manager so recommend a hedge. b) If the stock instantaneously moves up $1, how well does the hedge perform. Similarly if the stock moves down $1 how does the hedge perform? c) In both of these moves recommend how you would rebalance the hedge? Attempt all problems If you need to make an assumption to complete a calculation be explicit about what it is Q3) (15 Points) A trader holds the following portfolio of options. All of the following apply to each option: value is based on Black Scholes model, 1 year to maturity, annual risk free rate is 2%, dividends are 0 and the stock trades at 100. Assume continuous compounding. Long 100 Calls: Volatility = 20%, Strike 100 Short 100 Puts: Volatility = 30%, Strike 90 Short 50 Calls: Volatility = 35%, Strike 120 a) The trader wants to hedge and the only instrument available to do that is the stock. You are the risk manager so recommend a hedge. b) If the stock instantaneously moves up $1, how well does the hedge perform. Similarly if the stock moves down $1 how does the hedge perform? c) In both of these moves recommend how you would rebalance the hedge

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