80.2K

Verified Solution

Link Copied!

An investment bank has written a number, N, of European call options on a non-dividend paying stock with strike price R150, current stock price R 175 , time to expiry of 2 years and an assumed continuously - compounded interest rate of 4% p.a. The bank is delta-hedging the option position assuming the Black-Scholes framework holds and currently holds 150,000 shares of the stock and is short R 18,000000 in cash. (ii) By using the hedging position and the Black-Scholes formula for the value of the option, derive two equations satisfied by N and , the bank's assumed volatility. [4] (iii) Estimate by interpolation. [35] (iv) Deduce the value of N.[15] An investment bank has written a number, N, of European call options on a non-dividend paying stock with strike price R150, current stock price R 175 , time to expiry of 2 years and an assumed continuously - compounded interest rate of 4% p.a. The bank is delta-hedging the option position assuming the Black-Scholes framework holds and currently holds 150,000 shares of the stock and is short R 18,000000 in cash. (ii) By using the hedging position and the Black-Scholes formula for the value of the option, derive two equations satisfied by N and , the bank's assumed volatility. [4] (iii) Estimate by interpolation. [35] (iv) Deduce the value of N.[15]

Answer & Explanation Solved by verified expert

See Answer