“Q1”, you are given weekly prices for a particular non‐dividend paying stock. Suppose a FI has written and sold 10,000 European put options to a client, with current stock price S0=$49, strike price K=$50, risk‐free interest rate r=5%, stock price volatility σ=20% and time to maturity 20 weeks. Work out a dynamic delta‐hedging strategy, similar to that of Table 8.2. Briefly explain why the overall profit/loss of the hedge portfolio is close to zero at maturity1. (2 Marks) 2. On the worksheet named “Q2”, you are given daily prices of two asset classes over the last 5 years. Estimate the EWMA model in (10.8) of the textbook for the daily volatilities of the two stocks and also for the daily covariance of their returns (see Example 11.1 on p.247)2. Show your output in a format similar to Table 10.43. Plot the daily volatilities of the two asset classes on the same graph, similar to Figure 10.5. On a separate graph, plot the daily correlation of returns. What could be a potential issue if we estimate volatilities and correlation in this way?
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