Delta hedging & Arbitrage opportunity
I’m on Problem 2, for reading 44 (Derivatives), part B.
I understand most of it. I’m just lost on the arbitrage if stock price goes up.
At the beguinning, we went short 100 call options, and bought 80 shares.
If stock prices goes up, we deliver 80 shares to fullfill 80 of our options.
Now, we need 20 more shares, so we buy 20 shares for 110 each => an outflow of $2,200.
That is hardly the inflow of $6,800 we would need to make the arbitrage work.
The reading barely adds up the value of the shares with the one of the call options: 80*110 - 100*20 and gets the inflow of $6,800 that we were looking for.
PS: I understand the computation from the reading, I just would like to know how that would play out if we actually delivered the shares.
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