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1. [3 points] Assume that the current stock price is 30, the stock pays dividend continuously at a rate proportional to its p

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Answer #1

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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