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The delta of a stock option is the option price sensitivity to the underlying stock price change, which is the ratio of the change in the price of the stock option to the change in the price of the underlying stock. (a) Compute the delta of the stock option at the end of the time step for the one-period binomial lattice considered in "Illustration" of Lecture 6. (b) Compute the delta of the stock option at the end of the first and second time step for the two-period lattice in "Illustration" of Lecture 7. Note that you have to compute two deltas at the end of the second time step. (c) Repeat the same calculation for the lattice in "Put Example" of Lecture 7. Illustration ▸ Valuation of a European call option to buy a stock for $21 in three months ▸ Assume the following lattice for the stock price Stock price = $22 Stock price = $20 ● Stock price = $18 ▸ Assume the risk-free rate is 12% per annum (compounded continuously) LECTURE ON 6 TOP, 7 ON BOTTOM Illustration ▸ Extend the analysis to a two-period binomial lattice Stock price starts at $20 and in each of two time steps may go up by 10% or down by 10% Each time step is three months long Risk-free interest rate is 12% per annum (compounded continuously) ▶ Consider a European call option with a strike price of $21

The delta of a stock option is the option price sensitivity to the underlying stock price change, which is the ratio of the change in the price of the stock option to the change in the price of the underlying stock. (a) Compute the delta of the stock option at the end of the time step for the one-period binomial lattice considered in "Illustration" of Lecture 6. (b) Compute the delta of the stock option at the end of the first and second time step for the two-period lattice in "Illustration" of Lecture 7. Note that you have to compute two deltas at the end of the second time step. (c) Repeat the same calculation for the lattice in "Put Example" of Lecture 7. Illustration ▸ Valuation of a European call option to buy a stock for $21 in three months ▸ Assume the following lattice for the stock price Stock price = $22 Stock price = $20 ● Stock price = $18 ▸ Assume the risk-free rate is 12% per annum (compounded continuously) LECTURE ON 6 TOP, 7 ON BOTTOM Illustration ▸ Extend the analysis to a two-period binomial lattice Stock price starts at $20 and in each of two time steps may go up by 10% or down by 10% Each time step is three months long Risk-free interest rate is 12% per annum (compounded continuously) ▶ Consider a European call option with a strike price of $21

Financial Accounting Intro Concepts Meth/Uses
Financial Accounting Intro Concepts Meth/Uses
14th Edition
ISBN:9781285595047
Author:Weil
Publisher:Weil
Chapter15: Shareholders’ Equity: Capital Contributions And Distributions
Section: Chapter Questions
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The delta of a stock option is the option price sensitivity to the underlying stock price change, which is the ratio of the change in the price of the stock option to the change in the price of the underlying stock. (a) Compute the delta of the stock option at the end of the time step for the one-period binomial lattice considered in "Illustration" of Lecture 6. (b) Compute the delta of the stock option at the end of the first and second time step for the two-period lattice in "Illustration" of Lecture 7. Note that you have to compute two deltas at the end of the second time step. (c) Repeat the same calculation for the lattice in "Put Example" of Lecture 7. Illustration ▸ Valuation of a European call option to buy a stock for $21 in three months ▸ Assume the following lattice for the stock price Stock price = $22 Stock price = $20 Stock price = $18 ▸ Assume the risk-free rate is 12% per annum (compounded continuously) LECTURE ON 6 TOP, 7 ON BOTTOM Illustration ▸ Extend the analysis to a two-period binomial lattice ) Stock price starts at $20 and in each of two time steps may go up by 10% or down by 10% Each time step is three months long ▶ Risk-free interest rate is 12% per annum (compounded continuously) Consider a European call option with a strike price of $21
Transcribed Image Text:The delta of a stock option is the option price sensitivity to the underlying stock price change, which is the ratio of the change in the price of the stock option to the change in the price of the underlying stock. (a) Compute the delta of the stock option at the end of the time step for the one-period binomial lattice considered in "Illustration" of Lecture 6. (b) Compute the delta of the stock option at the end of the first and second time step for the two-period lattice in "Illustration" of Lecture 7. Note that you have to compute two deltas at the end of the second time step. (c) Repeat the same calculation for the lattice in "Put Example" of Lecture 7. Illustration ▸ Valuation of a European call option to buy a stock for $21 in three months ▸ Assume the following lattice for the stock price Stock price = $22 Stock price = $20 Stock price = $18 ▸ Assume the risk-free rate is 12% per annum (compounded continuously) LECTURE ON 6 TOP, 7 ON BOTTOM Illustration ▸ Extend the analysis to a two-period binomial lattice ) Stock price starts at $20 and in each of two time steps may go up by 10% or down by 10% Each time step is three months long ▶ Risk-free interest rate is 12% per annum (compounded continuously) Consider a European call option with a strike price of $21
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