Exam FAM Practice Question 2
Study guide: Exam FAM
A market-maker writes 500 six-month European put options on a stock that pays no dividends. You are given:
i) The current stock price is 60.
ii) The strike price is 65.
iii) The continuously compounded risk-free interest rate is 4%.
iv) The volatility of the stock is 25%.
The market-maker delta-hedges the written puts using the stock, under the Black-Scholes framework.
Determine the stock transaction the market-maker makes to delta-hedge the position, to the nearest whole share.
- A) Buy 200 shares
- B) Sell 200 shares
- C) Buy 300 shares
- D) Sell 300 shares
- E) Sell 333 shares
Answer this question and see the worked solution