Let S 40 0 30 r 0 08
Let S = $40, σ = 0.30, r = 0.08, T = 1, and δ = 0. Also let Q = $60, σQ = 0.50, δQ
= 0, and ρ = 0.5. In this problem we will compute prices of exchange calls with
S as the price of the underlying asset and Q as the price of the strike asset.
a. Vary δ from 0 to 0.1. What happens to the price of the call?
b. Vary δQ from 0 to 0.1. What happens to the price of the call?
c. Vary ρ from −0.5 to 0.5. What happens to the price of the call?
d. Explain your answers by drawing analogies to the effects of changing inputs in the Black-Scholes call pricing formula.
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