Assume the Black-Scholes framework. For a 3-month 32-strike European straddle on a stock, you are given:
(i) The payoff of the straddle is the absolute value of the difference between the strike price and the stock price at the expiration date.
(ii) The stock currently sells for $30.
(iii) The stock’s volatility is 30%.
(iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 2%.
(v) The continuously compounded risk-free interest rate is 5%.
Calculate the current elasticity of the straddle.