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Assume currently the price of a stock is $20 and a bank sold 100,000 call options on this stock with a strike price of $15. The bank wants to use delta hedging to protect itself.
The price changes and the corresponding deltas of the option are as follows over the first three weeks. (The bank rebalances every week). The risk free rate is 3%.
Time Price Delta
0 20 0.70
1 21 0.74
2 18 0.60
3 16 0.49
Make table that shows the stock positions necessary to delta hedge every week and the weekly and cumulative costs of delta hedging.
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