option pricing

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option pricing

Postby madhuri1682 » Sat Nov 03, 2012 9:53 pm

A bank has sold $300,000 USD of call options on 100,000 equities. The equities trade at 50, the option strike price is 49, the maturity is in 3 months, volatility is 20%, and the interest rate is 5%. How does it the bank delta hedge? Round to the nearest thousand share.
Choose one answer.
a. Buy 65,000 shares.
b. Buy 100,000 shares.
c. Buy 21,000 shares.
d. Sell 100,000 shares.

please explain how to calculate delta. i am getting N(d1) as 1.29 but the answer says 0.65. where am i going wrong?


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Re: option pricing

Postby swarnendupathak » Mon Nov 05, 2012 10:14 am

The N(d1) as per tyhe formula is comming 0.378 & with the Z value its comming as 0.65.

d1 = (ln(s0/k)+(Rf+var/2)*0.25)/(sd*time^0.5)

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Re: option pricing

Postby balajismz » Mon Nov 05, 2012 10:21 am

Here there is a catch, S and X are almost close, so take delta as 0.5 we get the no. of shares are 50000 and 65000 is the closest value

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