# Question

Consider the hedging example using gap options, in particular the assumptions and prices in Table 14.4.

a. Implement the gap pricing formula. Reproduce the numbers in Table 14.4.

b. Consider the option withK1= $0.8 andK2 = $1. If volatility were zero, what would the price of this option be? What do you think will happen to this premium if the volatility increases? Verify your answer using your pricing model and explain why it happens.

a. Implement the gap pricing formula. Reproduce the numbers in Table 14.4.

b. Consider the option withK1= $0.8 andK2 = $1. If volatility were zero, what would the price of this option be? What do you think will happen to this premium if the volatility increases? Verify your answer using your pricing model and explain why it happens.

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