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Black-Scholes Model (35 points). We have the standard Black-Scholes model consisting of a risk free bond and a stock. Their dynamics are given by =
Black-Scholes Model (35 points). We have the standard Black-Scholes model consisting of a risk free bond and a stock. Their dynamics are given by = dBt = rBrdt dSt = u Stdt + oStdzt. (1) (2) = 4. Hedging (20 points). Assume that we have the standard Black-Scholes model (1)-(2). There is a portfolio pt, St) that is neither delta-neutral nor gamma-neutral. (a) Delta hedge p using the underlying stock. (b) Gamma hedge p using the underlying stock and another derivative f that has a different nonzero gamma than p. Black-Scholes Model (35 points). We have the standard Black-Scholes model consisting of a risk free bond and a stock. Their dynamics are given by = dBt = rBrdt dSt = u Stdt + oStdzt. (1) (2) = 4. Hedging (20 points). Assume that we have the standard Black-Scholes model (1)-(2). There is a portfolio pt, St) that is neither delta-neutral nor gamma-neutral. (a) Delta hedge p using the underlying stock. (b) Gamma hedge p using the underlying stock and another derivative f that has a different nonzero gamma than p
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