a) What is the status of your hedge portfolio on Wednesday morning? b) What parts of this trading situation violate the assumptions of the BSM model. c) How would you recommend they change their pricing and/or hedging arrangements in the future

a) What is the status of your hedge portfolio on Wednesday morning? b) What parts of this trading situation violate the assumptions of the BSM model. c) How would you recommend they change their pricing and/or hedging arrangements in the future

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter21: Supply Chains And Working Capital Management

Section: Chapter Questions

Problem 6P

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Question

Answer all the subparts a,b,c.if answered within 45mins,it would be helpful!!!

Problem 20.2 On Tuesday 3rd November 2020 Alibaba Holding Group Limited had a closing price of 299.80 Hong Kong Dollars. After the market had closed, news broke that the planned IPO for Ant financial had been suspended. On Wednesday 4th November at 9:30am when HKEX opened for trading Alibaba was trading at 273.00 HKD, a 8.9% price drop. Imagine you were working for a bank who had sold put options on Alibaba with a strike price of 300.00 HKD, with expiration on the 6th of November. The bank sold the put options using the price suggested by Black-Scholes. They were hedging the option as if the BSM model was exactly true. a) What is the status of your hedge portfolio on Wednesday morning?

b) What parts of this trading situation violate the assumptions of the BSM model.

c) How would you recommend they change their pricing and/or hedging arrangements in the future

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