Illustrate how to construct a dynamic hedge

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Reference no: EM131318648

Suppose you own 50,000 shares of stock valued at $35.50 per share. You are interested in protecting it with a put that would have a delta of 0.62. Assume, however, that the put is not available or is unfairly priced.

Illustrate how to construct a dynamic hedge using a risk-free debt instrument that would replicate the position of having the put.

Ignore the cost of the puts. Show how the hedge works by explaining what happens if the stock falls by one dollar.

Reference no: EM131318648

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