Consider an option on a non-dividend-paying stock when the stock price is $45, the strike price is $42, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is five months. It can be shown that d1 = .7576 and d2 = .6285.
1. Explain how to create a delta neutral portfolio of call options and stock. Short 10,000 call options (100 contracts).
2. How many shares would you buy or sell?