Question
HSBC Holdings stock has an annual volatility of = 0.25 and a price of 9.25 a share. A European call option on HSBC stock with
HSBC Holdings stock has an annual volatility of = 0.25 and a price of 9.25 a share. A European call option on HSBC stock with a strike price of 10 and an expiration time of one year has a price of 1. Using the Black-Scholes model, describe how you would construct an arbitrage portfolio, assuming that the present value of the strike price is 9.45. Would the arbitrage portfolio increase or decrease its position in HSBC stock if shortly thereafter the stock price of HSBC rose to 9.30 a share?
Please provide explanations as well.
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Public Finance In Canada
Authors: Harvey Rosen, Beverly George Dahlby, Roger Smith, Jean-Francois Wen, Tracy Snoddon
3rd Canadian Edition
0070951659, 978-0070951655
