Consider the log-normal asset price model with s0 80 s 30, Finance Basics

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Consider the log-normal asset price model with s0 80 s 30

Question: Consider the log-normal asset price model with S0 = $80, σ = 30%, and r = 6%. Construct

(a) a delta-gamma neutral portfolio and

(b) a delta-rho neutral portfolio to hedge a short position on 500 calls expiring after 90 days with strike price $80, taking as an additional component a call option expiring after 120 days with strike price $85. Find the changes in value of these portfolios after 5 days if one of the following three scenarios will happen:

(i) the stock drops to $75;

(ii) the interest rate jumps to 9%;

(iii) the stock drops to $75 and the interest rate jumps to 9%.

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Finance Basics: Consider the log-normal asset price model with s0 80 s 30

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