An ATM call with 3 months to expiry. The current stock price is $20, the risk-free rate

Fantastic news! We've Found the answer you've been seeking!

Question:

An ATM call with 3 months to expiry. The current stock price is $20, the risk-free rate is 10% and volatility is 25% per annum.

A) Derive a closed-form expression for the sensitivity of the options’ delta with respect to implied volatility: d^2 C/dσdS

B) Confirm and compare your analytical solution numerically

C) Is there an intuitive explaination for what this sensitivity means?

D) Plot d/dthetaδC vs S. Explain what happens, and why, as the call option goes in and out of the money. dσ

E) Verify the interest rate tree that we created in class by pricing up a 5% two-year coupon bond (not callable) using discount factors and the tree.

Related Book For answer-question

Agricultural Economics

ISBN: 978-0136071921

3rd edition

Authors: Evan Drummond, John Goodwin

See More Books

Posted Date: Oct 16, 2020 04:45 PM

See More Questions

The current stock price is 50. One period later, its value becomes three possible outcomes: {35,55, 60}. The value of $10 invested in the risk-free asset becomes $10.5 in one period. Find the upper...
Your Beloved Machines current stock price is $90. YBM December 100 calls trade for $6. a. Adjust the options prices and terms of the contract for a 4:1 split. b. Adjust the options prices and terms...
1. The current stock price is $80. The stock pays a dividend of $2 every quarter. The risk-free rate is 4%. Over each of the next three-month periods the stock could go up by 10% (u=1.1) or down by...
What is the "ALDI Way" and what was its quest? Take out costs; eliminate complexity Survival; make enough money to pay overhead costs Increase market share; find more prospective customers Build...
(a) Do directors of a corporation in the zone of insolvency owe a fiduciary duty to creditors? (b) Under what circumstances will the business judgment rule protect directors from personal liability...
What is the profitability index?
Calculate the pressure change $\left(p_{2}-p_{1} ight)$ for the jet pump shown in Fig. P5.52. The fluid is $20{ }^{\circ} \mathrm{C}$ water. Assume negligible friction at the walls and uniform...
FFDP Corp. has yearly sales of $28 million and costs of $12 million. The companys balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the...
A steam turbine having an isentropic turbine efficiency of 90% drives an air compressor having an isentropic compressor efficiency of 85%. Steady-state operating data are provided on the figure....
On 1/09/2017 "ABC" Company received $30,000 from customer "X" for services to be performed evenly over a 12 months period starting 1/12/2017. In addition, on 1/10/2017 "ABC" received $11,880 from...
A U.S. MNC has subsidiaries in Britain and Japan. Assume the revenue in both subsidiaries in local currency remains the same. British WOS Revenue 100M $1.77 -> $1.8/ Japanese WOS Y 10 Bn V 75.12/$ ->...
According to the Hawail Wildlife Fund, North Pacific Humpback Whales migrate from the icy waters around Alaska during the fall to spend the winter in Hawaii where they mate, give birth, and nurture...
1. 2. 3. 4. 5. 6. For every sales rep, list the sales rep's last name and the sales rep's first name in lower case letters. For every customer, list the customer's last name and the customer's first...
b) Fill in blank spaces in Table 1b and interpret the results. Given the following marketing report from a production firm, answer the following questions. Table 1a Confirmatory Specification with...
Draw two boxes and label with names of learners A and B. Below [A], write "Saver",and below [B], write "users of funds" If A knows that B is in need of funds, or if B knows that A is willing to...
Discuss three benefits of seeking feedback, both in formal and informal ways, from those who are being coached. Discuss whether feedback should be formative or summative and justify your response....
Question 1 Determine the magnitude of the force F (in kN) so the resultant couple moment is 20 kN.m clockwise. Consider 0 = 40 degrees. 6 kN 2 m 4 m A F 6 kN 12 kN.m 0 -F
The Alert Company is a closely held investment-services group that has been very successful over the past five years, consistently providing most members of the top management group with 50% bonuses....
Keynes argued that the Classical view of the macro economy was not always valid. Why?
What are the advantages of owning a stock mutual fund as opposed to directly owning stock?
As shown in Figure 16-6 the marketing bill has consistently grown over the past fifty years. What are some of the factors that have led to this growth?
What is the direction of the magnetic field at a point vertically (a) above (b) below segment 1 in Figure 28.5? Figure 28.5 Mapping the magnetic field of a current loop. The magnetic field...
Make a sketch showing the directions of the magnetic forces exerted on each other by (a) an electron moving in the same direction as the current through a wire, (b) a moving charged particle and a...
As the current loop in Figure 28.10 rotates over the first $90^{\circ}$, do the magnitudes of (a) the magnetic force exerted on the horizontal sides and (b) the torque caused by these forces...

An ATM call with 3 months to expiry. The current stock price is $20, the risk-free rate

Question:

Expert Answer:

Answer A We have a call option with three months to expiry and the current stock price is 15 If we assume that the stock price is fair ie it takes no ... View the full answer

Agricultural Economics

Students also viewed these finance questions