The delta of a digital option that pays $1 when S(T)>K is e-T n(d2 )/[OST/2] Create...

  

Transcribed Image Text:

The delta of a digital option that pays $1 when S(T)>K is e-¹T n(d2 )/[OST¹/2] Create an Excel worksheet in which the user input K, r, o, q and T. Compute the delta of the digital option for stock prices S = 0.01K, 0.02K, ..., 1.99K, 2K (i.e., S/K = i for i = 1, 2, ..., 200) and plot the delta against the stock price. Given that in reality it is costly to trade due to commissions and the bid-ask spread, do you see any problems with delta hedging a short digital option near maturity if it is close to being at the money? How to interpret a delta value which is higher than 1? The delta of a digital option that pays $1 when S(T)>K is e-¹T n(d2 )/[OST¹/2] Create an Excel worksheet in which the user input K, r, o, q and T. Compute the delta of the digital option for stock prices S = 0.01K, 0.02K, ..., 1.99K, 2K (i.e., S/K = i for i = 1, 2, ..., 200) and plot the delta against the stock price. Given that in reality it is costly to trade due to commissions and the bid-ask spread, do you see any problems with delta hedging a short digital option near maturity if it is close to being at the money? How to interpret a delta value which is higher than 1?

Answer rating: 100% (QA)

Excel Worksheet Setup 1 User Input Label cells A1 to A5 as follows K r q T strike price interest rate volatility dividend rate time to maturity Input ... View the full answer