Homework Answers
As per question, I shorted a call on Monday worth 0.10 for a stock price of $10 when stock was trading at $9.
If the stock has high volatility, it has higher risk/return. As I would have delta hedged my net positions, hence must have taken higher risk for better returns. Hence the though would have been of actual volatility near 0.05.
Hence the answer for it is (a). 0.05
Delta Δ = (Of – Oi) / (Ef – Ei)
where,
- Of= Final value of the option
- Oi= Initial value of the option
- Ef = Final value of the underlying stock
- Ei= Initial value of the underlying stock
Hence:
(0.05-0)/(10-9)=0.05
The price to net on Friday will be 0.05 per quantity of stock.
Add Answer to:
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