Question
On Tuesday 3rd November 2020 Alibaba Holding Group Limited had a closing price of 299.80 Hong Kong Dollars. After the market had closed, news broke
On Tuesday 3rd 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 4th 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 6th 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. Problem:What is the status of your hedge portfolio on Wednesday morning?
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