(a)Suppose XYZ is a non-dividend-paying stock. Suppose S = $100, σ = 40%, δ = 0,
and r = 0.06.
(i)What is the price of a 105-strike European call option with 1 year to
(ii)What is the price of a 105-strike European put option with 1 year to
(iii)Verify the put-call parity.
Market maker is taking position in 1 million units of the following bull
spread: buy a 40- strike call and sell a 45-strike call. Suppose S = $40, σ =
0.30, r = 0.08, δ = 0, and T = 0.5.
(i)How does market maker hedge the bull spread position? How many shares to buy or
short sell? How much money to borrow or lend?
(ii)Suppose one day later, the stock price is $41. What is the overnight profit of
market maker's delta-hedged position?
(a) (i) The price of call option is $1.12 (ii) The price of put option is $0 (iii) Verification... View the full answer