QUESTION 1.

a. What position should the company take in the stock for delta neutrality?

b. Suppose that the bank does set up a delta neutral position as soon as the option has been sold and the stock price jumps to 42 within the first hour of trading. What trade is necessary to maintain delta neutrality? Explain whether the bank has gained or lost money in this situation. (You do not need to calculate the exact amount gained or lost.)

c. Repeat part b) on the assumption that the stock jumps to 38 instead of 42.