Question: Provide the correct answers. Consider a binomial lanice model for a 2-month call option with an exercise price of 200. Suppose that the share price

Provide the correct answers.

Consider a binomial lanice model for a 2-month call option with an exercise price of 200. Suppose that the share price either goes up by 4% or down by 3% each month, that the risk-free continuously-compounded rate is 19% per month and that the current share price is also 200, Use the formula above to estimate the value of the option.An investor claims to be able to value an unusual derivative on a non-dividend paying share using the pricing formula: where S, denotes the price of the share at time I. Derive formulae for the delta and gamma of the derivative, based on the pricing formula above. (2] (i1) For each of the following scenarios, calculate the number of shares that must be purchased or sold along with a short holding in one derivative, in order to achieve a delta-hedged portfolio: (a) the current share price is 1 (b) the current share price is 3. [2] Explain which of the scenarios in (il) is likely to involve more portfolio management in the near future if the investor is determined to maintain a delta-hedged portfolio. [2] [Total 6]

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