Exam3F07 - A B Freeman School of Business MBA Financial...

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A. B. Freeman School of Business MBA Professor Paul A. Spindt Financial Modeling Fall 2007 Third Examination General Directions Submit your solutions to the specific questions below, in an EX- CEL Workbook, electronically to me at [email protected] with a copy to [email protected] Be sure to include your name on the document as well as on the email. Your EXCEL document should be sufficient, but if you wish to add additional text, you may attach a PDF file containing your comments, explanations, doubts, excuses, or whatever. Your must submit your solutions by 6:00 p.m. on Wednesday, October 10, 2007. Enjoy. Specific Questions 1. The “Greeks” are measures of sensitivity of option prices to vari- ous parameters. Two important greeks are (a) Δ, which measures the sensitivity of an option price to varia- tion in the price of the underlying asset. For a European call on a non-dividend paying stock, Δ = N ( d 1 ) 1
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where N () is the cumulative standard normal distribution function and d 1 is defined as in the Black-Scholes model. (b) Γ, which measures the sensitivity of Δ to variation in the price of the underlying asset. For a European call on a non-dividend paying stock, Γ = N ( d 1 ) T where N () is the standard normal density function, S is the price of the underlying asset, and σ is volatility.
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