Hello. Can someone help explain Q44 on Replicating Option Payoff? Thanks!
I assume you refer to the question about replicating the call option payoff through the hedge ratio.
From the curriculum: c = h*S + PV ( - h*S + c-), hence:
h is given, S is given r is given to calculate the PV and c- is given. Plugin the numbers and there you have it.
Regarding the question from the Mock: the vignette states that you LEND money (which would imply a positive sign) but you have (- h * S ) which means you are borrowing.
Hi Shark - thanks for the reply! Make sense now
I calculated the PV and got (-0.52 * 648 + 0)/(1.03) = EUR 327.15. Is this right? The number provided is EUR 356.79
Also do you mind explaining the intuition behind the formula?
h = 0.5697, not 0.52.
Id love to know where the answer got 0.5671 from though…
(1 ÷ 1.03) × ((0.5671 × 648) + 0) = 356.79.
hedge ratio = (c+-c-)/(S+-S-)
.5671 = (102.0816-0)/((828-648)