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The current price of a non-dividend-paying stock XYZ is $30. The annual volatility of XYZ price is 20%. Suppose that you have a six-month short call position with the strike price of $32. Assume the continuously compounding risk-free rate is 5%.

A) Using risk-less portfolio approach, what long position in the XYZ stock is necessary to hedge the short call position? (Calculate the number of shares you must purchase to hedge one short call)

Strategy (portfolio you use to replicate the option behavior), and Calculations:

B) What is the value the call option?

Calculations:

C) What long position in the stock s necessary to hedge a long put option when the strike price is $32. Calculate the number of shares you purchase.

Strategy (portfolio you use to replicate the option behavior), and Calculations:

D) What is the value of the put option?

Calculations:

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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