Delta neutral portfolio of call options and stock

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Reference no: EM131034977

1. A common stock will have a price of either $75 or $25 in 2 months. A two month put option on the stock has a strike price of $30.

A. Create a riskless portfolio. Buy one put option.

B. How many shares should you buy?

2. Consider an option on a non-dividend-paying stock when the stock price is $45, the strike price is $42, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is five months. It can be shown that d₁= .7576 and d₂= .6285.

A. Explain how to Create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts).

B. How many shares would you buy or sell?

Reference no: EM131034977

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