How much is the total hedging cost

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Reference no: EM134033687

Question

A financial institution has sold a European put option on 100,000 shares of a non-dividend-paying stock. We assume that the stock price is $49, the strike price is $50, the risk-free interest rate is 5% per annum, the stock price volatility is 20% per annum, the time to maturity is 20 weeks (0.3846 years), and the expected return from the stock is 13% per annum.

1. Given the simulated weekly prices for 20 weeks, produce a table similar to Table 19.3 on p.405 of the textbook.

2. How much is the total hedging cost?

3. Compare the hedging cost to the theoretical Black-Scholes-Merton price.

Reference no: EM134033687

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