![1. [3 points] Assume that the current stock price is 30, the stock pays dividend continuously at a rate proportional to its p](http://img.homeworklib.com/questions/1e2a6b80-719f-11ea-9d96-29aa4aa1b697.png?x-oss-process=image/resize,w_560)
Homework Answers
To delta hedge his position of selling call options, he has to buy put options.
Inflow from selling call option= 25*1.8779=46.94
Outflow from buying put option= 25*2.3=57.5
When stock price increase to 35, call option is worthless while put option is exercised
So profit from exercise of put option = (S1-X)*25=(35-32)*25= 75
Net Profit= 75-57.5+46.94= 64.44
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