What investment is required for delta-hedged portfolio

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Reference no: EM131866166

A stock is currently trading for $40 per share. The stock will pay no dividends. The annual continuously compounded risk-free interest rate is 0.08, and the stock price volatility is 0.3. Suppose you buy a 40-strike call and sell a 45-strike call both expiring in 91 days. Both calls are written on 100 shares.

(a) What investment is required for a delta-hedged portfolio?

(b) What is your profit the next day if the stock falls to $39?

(d) Now assuming stock price volatility is 0.25. Suppose you sell a 60-strike call expiring in 91 days. What is the overnight profit if the stock goes up to $60.35?

Reference no: EM131866166

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