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Explain the risk faced by the bank

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Reference no: EM132714303

As a representative dealer in a bank, you have just sold a European put option.

(a) Explain the risk faced by the bank if you do not hedge this option.

(b) How does the bank dynamically delta hedge this position using the Black-Scholes framework?

(c) What do you think is a major shortcoming in using the Black-Scholes model to delta hedge European options?

Reference no: EM132714303

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