Question 1: What, to the nearest cent, is the lower bound for the price of a two

Question

Question 1: What, to the nearest cent, is the lower bound for the price of a two-year European call option on a stock when the stock price is $20, the strike price is $15, and the risk-free interest rate with continuous compounding is 5% and there are no dividends?

Question 2: A portfolio of derivatives on a stock has a delta of 2400 and a gamma of –100. An option on the stock with a delta of 0.6 and a gamma of 0.04 can be traded.

What position in the option creates a portfolio that is gamma neutral? Give size of position and state whether it is long or short

After this position has been taken what position in the stock is then necessary for delta neutrality? Give size of position and state whether it is long or short

Explanation / Answer

Answer:1 $6.43

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