Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On Tuesday 3 rd November 2020 Alibaba Holding Group Limited had a closing price of 299.80 Hong Kong Dollars. After the market had closed, news

On Tuesday 3 rd November 2020 Alibaba Holding Group Limited had a closing price of 299.80 Hong Kong Dollars. After the market had closed, news broke that the planned IPO for Ant financial had been suspended. On Wednesday 4 th November at 9:30am when HKEX opened for trading Alibaba was trading at 273.00 HKD, a 8.9% price drop. Imagine you were working for a bank who had sold put options on Alibaba with a strike price of 300.00 HKD, with expiration on the 6 th of November. The bank sold the put options using the price suggested by Black-Scholes. They were hedging the option as if the BSM model was exactly true.

a) What parts of this trading situation violate the assumptions of the BSM model.

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

Financial Management Theory And Practice

Authors: Eugene F Brigham, Michael C Ehrhardt

11th Edition

0324259689, 9780324259681

More Books

Students also viewed these Finance questions

Question

Am I buying this in an attempt to satisfy a psychological need?

Answered: 1 week ago