FINANCIAL MODELING

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9. Assume the Black-Scholes framework. You are given the following information: - The current stock price of a non-dividend paying stock is R81. - The stock's volatility is 33% per annum. - The continuously compounded rate of interest is 5.7% per annum. You sell ten thousand 2-year 70-strike European put options on this stock. You then delta hedge this position by using 2-year 70-strike European call options on this stock. How many call options you are supposed to buy or sell? [5] Put-Call Parity: ct+Ker(Tt)=pt+Steq(Tt) Black-Scholes European option pricing formulae: c0=S0eqTN(d1)KerTN(d2)p0=KerTN(d2)S0eqTN(d1) where d1=Tln(Ks1)+(rq+2/2)Td2=d1T 9. Assume the Black-Scholes framework. You are given the following information: - The current stock price of a non-dividend paying stock is R81. - The stock's volatility is 33% per annum. - The continuously compounded rate of interest is 5.7% per annum. You sell ten thousand 2-year 70-strike European put options on this stock. You then delta hedge this position by using 2-year 70-strike European call options on this stock. How many call options you are supposed to buy or sell? [5] Put-Call Parity: ct+Ker(Tt)=pt+Steq(Tt) Black-Scholes European option pricing formulae: c0=S0eqTN(d1)KerTN(d2)p0=KerTN(d2)S0eqTN(d1) where d1=Tln(Ks1)+(rq+2/2)Td2=d1T