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Unformatted text preview: put price. 5. A. The delta of the inverse butterfly spread = 0.84 + 2*0.58  0.32 = 0. 6. C. To hedge, the trader should long 1500 euros. The interest rates are irrelevant. 7. A. Net delta = 100*0.33+100*0.5200*0.63 =43. 8. D. From Problem 7, he should long 43 shares. 9. D. To delta hedge short put options on 200 shares of stock, we must short 200*0.42 = 84 shares. 10. B. The total value of the hedged position in the previous problem is 84*50 + 2.5*200 = 4700, which is the amount you will initially lend. In one day, you will earn 4700*(e 0.08/3651) = $1.03 interest. If the stock price falls to 49 and the option is worth 2.93, you will profit (2.50  2.93)*200 = $86 on the puts you wrote and make (5049)*84 = $84 on the stocks you bought. Including interest, our one day profit is: 86 + 84 + 1.03 = $0.97....
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This note was uploaded on 01/16/2012 for the course FINA 442 taught by Professor Ms.etheridge during the Fall '11 term at South Carolina.
 Fall '11
 Ms.ETHERIDGE

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