NAB.AX is trading at $26 with a volatility of 25 percent. Consider a call option...
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NAB.AX is trading at $26 with a volatility of 25 percent. Consider a call option on this stock with an exercise price of $26 and an expiration in 90 days. The risk-free rate is 1.5 percent. Assume the call is trading at the Black Scholes Merton value. You construct a delta-hedged position involving the sale of 10,000 call options and the simultaneous purchase of an appropriate number of shares. 5 days later, the stock is trading at $24. You then adjust your position accordingly to maintain the delta hedge. The very next day the stock closes at $25.5. Compare the amount of money you end up with to the amount you would have had if you had invested the money in a risk-free bond. Explain all the necessary transactions and draw your conclusion. You can use the BlackScholesMertonBinomial10e. xlsm spreadsheet to price the call.
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