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  3. let the stock price be $50. we are given the follo

Let the stock price be $50. We are given the following information on the BSM...

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Accounting

Let the stock price be $50. We are given the following information on the BSM prices of three European call options with 3 months to expiration:

K 45 50 55
C 6.86 3.6 1.61
.83 .6 .35
.034 .052 .049

(a) Write down the equations which one needs to solve to make a zero-cost, delta-neutral portfolio with a convexity of 0.05 by using the three types of calls. Do not solve these equations.

(b) Graph the value of this portfolio as a function of the stock price. (You only need to illustrate the functional form and you need not do any serious numerical calculations.)

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