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(c) Given the following: Time to expiry of the option is 91 days. The current price of the stock is 55. The stock does not
(c) Given the following: Time to expiry of the option is 91 days. The current price of the stock is 55. The stock does not pay any dividend. The strike price is 50. The stock's annual volatility is 20%. The annual risk-free interest rate is 8%, compounded continuously. The option is priced using the Black-Scholes formula. Alxy, the market-maker, has written a put option. He would like to delta-hedge it with suitable portfolio. (i) Construct the Alxy's portfolio for his delta-hedging strategy. (6 marks) (ii) Determine Alxy's overnight profit if the price of the stock decreases to 53.5 in the next day (day 1). (4 marks) (iii) Continued from part (ii), determine the number of stock Alxy needs to purchase/sell to rebalance his hedging portfolio. (2 marks) (iv) Continued from part (iii), determine Alxy's overnight profit and his hedg- ing portfolio if the price of the stock increases to 55.8 in the next day (day 2). (8 marks)
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