Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Inputs S0 45 T 2 K 50 r 2% sigma 9% Compute d1 and d2. Assume there is no dividend yield. Assume that you price

Inputs

S0

45

T

2

K

50

r

2%

sigma

9%

  1. Compute d1 and d2. Assume there is no dividend yield. Assume that you price the option at t=0.
  2. Compute the price of the put option.
  3. Suppose you want to hedge using stocks and bonds. Specify the number of shares and the face value of the bond used to hedged.

Suppose that now you want to do the delta-gamma-hedging. Specifically, to do this hedge, use another Put Option with the same strike price and underlying, but with a time to expiration of T=0.8. Call this new put option D0. With this, you construct the portfolio:

0=P0-XS0+YD0+B0

Where X is the number of shares in the hedge. Y is the number of put options D0and B0is the face value of bond.

  1. What are the three conditions to find the values of X, Y and B0?
  2. Find the value of X, Y and B0

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Budgeting Auditing And Evaluation Functions And Integration In Seven Governments

Authors: Andrew Gray

1st Edition

0765807246, 9780765807243

More Books

Students also viewed these Accounting questions