Investment analysis subject

Question

An investor holds 200,000 shares in Didi& Co. and is considering buying some put options to hedge her investment. Didi& Co.s current share price is RM 6.00. The risk free interest rate is currently 12% pa and the recent volatility of Didi& Co. shares has been 30% per annum. She requires European put options with an exercise price RM5.00 for exercise in two years time.

a) Calculate the value that the bank is likely to charge for 500,000 put options of the investors required specification.

b) A friend informs the investors that she could achieve a safer position by selling call options to construct a delta hedge. Calculate the number of call option to be sold to construct a delta hedge.