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(16) 6. Consider a stock with ? = 0.2 and today\'s stock price of S,-50, with in

ID: 1172085 • Letter: #

Question

(16) 6. Consider a stock with ? = 0.2 and today's stock price of S,-50, with interest rate of r = 0.04. You buy a Call option with K55 and T-1/2 year, as well as a Put option with K-45 and T 1/2. (10) (a) Using the information in the table below, make a prediction about how much would the portfolio VALUE change if the price of underlying shares FALLS by 10 cents. Justify your estimate (6) (b) You're worried about the volatility risk in your portfolio and would like to hedge it. There is a security on the market with Delta - 0.5, Gamma -0.3, Vega - 0.2. How much of that security you should buy to make your portfolio volatility-risk insensitive? Put 1.378193 0.6827154 .1692474 Gamma 0.05071236 0.03568547 Vega0.12678090.08921367 Call Price Delta 0.3221078

Explanation / Answer

Callk = 55 And Putk = 45

S0 = 50

Delta Call = 0.3221078 and Delta Put = -0.1692474

Thus for Price change of -0.10 $ = ( -1 /10 ) $