Unformatted text preview: X shares of a put with a strike price of 85 and a maturity of 1 year. The implied volatility of the put is 0.2/year and the risk-free rate is 0.01/year. (a) What is the Black-Scholes price of this put? (b) What is the Delta of this put? (c) The change in price of this portfolio from times t 1 to t 2 will be approximately 1000( S t 2-S t 1 ) + X Δ( S t 2-S t 1 ) = (1000 + X Δ)( S t 2-S t 1 ) where Δ is the Delta of the put. Find X so that (1000+ X Δ) = 0. What fraction of the portfolio is in the put? (Comment: Buying the put on X shares is called Delta-hedging.) 1...
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