A collect-on-delivery call (COD) costs zero initially, with the payoff at expiration being 0 if S Let
Question:
a. Value a European COD call option with the above inputs. (Hint: Recognize that you can construct the COD payoff by combining an ordinary call option and a cash-or-nothing call.)
b. Compute delta and gamma for a COD option. (You may do this by computing the value of the option at slightly different prices and calculating delta and gamma directly, rather than by using a formula.) Consider different stock prices and times to expiration, in particular setting t close to T .
c. How hard is it to hedge a COD option?
Step by Step Answer:
With a premium of P paid at maturity if S T K the COD will ...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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