Derive the formula for the covered call

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Reference no: EM131454775

Question: A covered call is a long stock and short call. The pattern of payoffs is given below:

In this problem, you are asked to simulate the payoffs of a covered call over 52 weeks, with weekly updating of the positions. Start by deriving the formula for the covered call: Add together the Black-Scholes price and the stock price:

230_covered 1.png

Thus we see that a covered call is a long position in the stock and a long position in the bond. Now implement the following spreadsheet to test the effectiveness of a simulated covered call strategy.

Reference no: EM131454775

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