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European Call Options Assignment

Author:
February 18th, 2020

Let the stock price be $50. We are given the following information on the BSM prices of three European call options with 3 months to expiration:

K 45 50 55
C 6.86 3.60 1.61
∆ .83 .60 .35
Γ .034 .052 .049

(a) Write down the equations which one needs to solve to make a zero-cost, delta-neutral portfolio with a convexity of 0.05 by using the three types of calls. Do not solve these equations.

(b) Graph the value of this portfolio as a function of the stock price. (You only need to illustrate the functional form and you need not do any serious numerical calculations.) Get Finance homework help today

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