Find the initial delta-gamma neutral hedging portfolio

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Reference no: EM131566444

Let $2.24 be the price of a European call option with strike $36 and expiration in 3 months; and let its delta be 0.5431 and its gamma be 0.0734. The current stock price is $36, volatility of the stock is 20%, and the annual continuously compounded interest rate is 3%.

(a) Find the time decay Θ of this call.

(b) Using a 2-month put option with strike 34, find the initial delta-gamma neutral hedging portfolio. The price of the 2-month put option is $0.85, its delta is −0.2894, and its gamma is 0.0776.

Reference no: EM131566444

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