Scribd
Upload
24 views2 pages

Assign 5

Uploaded by

hvxcgphwwh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
24 views2 pages

Assign 5

Uploaded by

hvxcgphwwh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Models and Pricing of Financial Derivatives

Homework 5 Deadline: January 3, 2024

1. Describe the payoff from a portfolio consisting of a floating lookback call and a floating lookback
put with the same maturity.

2. Explain why a regular European call option is the sum of a down-and-out European call and
a down-and-in European call. Is the same true for American call options?

3. How can the value of a forward start put option on a non-dividend-paying stock be calculated
if it is agreed that the strike price will be 10% greater than the stock price at the time the option
starts?

4. Calculate the price of a 1-year European option to give up 100 ounces of silver in exchange
for 1 ounce of gold. The current prices of gold and silver are $380 and $4, respectively; the risk-free
interest rate is 10% per annum; the volatility of each commodity price is 20%; and the correlation
between the two prices is 0.7. Ignore storage costs.

5. A financial institution has the following portfolio of over-the-counter options on sterling:


Type Position Delta of option Gamma of option Vega of options
Call -1,000 0.50 2.2 1.8
Call -500 0.80 0.6 0.2
Put -2,000 -0.40 1.3 0.7
Call -500 0.70 1.8 1.4
A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.
(a) What position in the traded option and in sterling would make the portfolio both gamma
neutral and delta neutral?
(b) What position in the traded option and in sterling would make the portfolio both vega neutral
and delta neutral?

6. With the notations used under the Black-Scholes model:


(a) What is N ′ (x)?
(b) Show that SN ′ (d1 ) = Ke−r(T −t) N ′ (d2 ), where S is the stock price at time t and
ln(S/K) + (r + σ 2 /2)(T − t) ln(S/K) + (r − σ 2 /2)(T − t)
d1 = √ , d2 = √ .
σ T −t σ T −t
(c) Calculate ∂d1 /∂S and ∂d2 /∂S.
(d) Show that when
c = SN (d1 ) − Ke−r(T −t) N (d2 ),
it follows that
∂c σ
= −rKe−r(T −t) N (d2 ) − SN ′ (d1 ) √ ,
∂t 2 T −t
where c is the price of a call option on a non-dividend-paying stock.
(e) Show that ∂c/∂S = N (d1 ).
1
2

(f) Show that c satisfies the Black-Scholes differential equation.


(g) Show that c satisfies the boundary condition for a European call option, i.e., that c = max(S −
K, 0) as t → T .

7. Use the put-call parity relationship to derive, for a non-dividend-paying stock, the relationship
between:
(a) The delta of a European call and the delta of a European put
(b) The gamma of a European call and the gamma of a European put
(c) The vega of a European call and the vega of a European put
(d) The theta of a European call and the theta of a European put.

You might also like