Let St denote the price of Google (GOOG) at time t. The spot price of GOOG...

 

Transcribed Image Text:

Let St denote the price of Google (GOOG) at time t. The spot price of GOOG is $400. The risk-free rate is 5%. Assume that St follows the log-normal model, with expected rate of return 10% and daily volatility of 1%. Assume there are 256 trading days a year. (a) Compute the Delta and Gamma of an at-the-money 6-month European put option on GOOG. (Gamma might be close to 0, but it is not 0.) = (b) Suppose at t 0 the price of GOOG jumps by $10 instantaneously, while everything else remains the same. Estimate how much the put option price changes using the Delta you computed in part (a). (c) Is this estimate an over-estimate or under-estimate? Justify your answer with only part (a); that is, without comparing (b) to the actual change in the two put prices when the spot goes from 400 to 410. Let St denote the price of Google (GOOG) at time t. The spot price of GOOG is $400. The risk-free rate is 5%. Assume that St follows the log-normal model, with expected rate of return 10% and daily volatility of 1%. Assume there are 256 trading days a year. (a) Compute the Delta and Gamma of an at-the-money 6-month European put option on GOOG. (Gamma might be close to 0, but it is not 0.) = (b) Suppose at t 0 the price of GOOG jumps by $10 instantaneously, while everything else remains the same. Estimate how much the put option price changes using the Delta you computed in part (a). (c) Is this estimate an over-estimate or under-estimate? Justify your answer with only part (a); that is, without comparing (b) to the actual change in the two put prices when the spot goes from 400 to 410.

Answer rating: 100% (QA)

a Compute the Delta and Gamma of an atthemoney 6month European put option on GOOG Gamma might be close to 0 but it is not 0 ANSWER Delta 05355 Gamma 0... View the full answer