Financial Derivatives (N1559) – Spring 2024
Seminar Questions Week 7
Seminar Questions
1. (JC 19.6) Special Motors Corporation’s stock price S is $59, the strike price K is $60, the maturity T is forty-four days, the volatility σ is 30 percent per year and the risk-free interest rate r is 3.3 percent per year. Find the price of a European call option using the BSM model.
2. () Assume the stock price S is $159, the strike price K is $150, the maturity T is three months, the volatility σ is 20 percent per year and the risk-free interest rate r is 2 percent per year.
(a) Find the price of an European put option using the BSM model.
(b) Given this data, compute the put option’s delta using the Black-Scholes-Merton model.
3. (JC 19.12a) Comment on the following question, carefully explaining your answer referring to the delta: ”As the stock price input increases, everything else constant, does a call option’s price increase or decrease?”
4. (JC 20.4) Use the same information as above.
(a) Describe how to set up the delta hedge for a long call option position based on your previous computations .
(b) If the stock price changes to $60 over the next trading day, what is the delta hedging error? Assume the Black-Scholes-Merton model accurately describes the movements in the call value.