Introduction to derivatives, Fall 2011
BUSI 588, Homework 3
Homework 3
Due at the beginning of class, September 21st, 2011.
1.
(*)
Consider pricing a call option with a strike price of $100 with 4month maturity on the
or down by 20% each 2months, and that it is currently trading for $100. The riskfree rate
(in annual terms) is at 5%.
(a) What would you estimate the value of the call option to be as of date 0?
went up in value? What if it went down?
(c) If you sold the option, how would you hedge your position by trading in the underlying
asset and cash? Be as precise as you can, i.e. outline what positions you would choose
to hold from today to maturity.
2.
(*)
The current price of Philip Glass Corp. is $52 and no dividends are expected during the
next four months. The current price of a 90day Tbill (your cash proxy) is $9857.35 (face of
$10,000). The weekly price history of the stock over the previous year had a realized volatility
(per week) of 4.1603%.
(a) What is the BlackScholes value of a 90day European call on this Philip Glass Corp. stock
with a $50 strike price?
(b) What would be the replicating strategy for this asset according to BlackScholes?
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 Fall '10
 Staff
 Derivatives, Pricing, Strike price, Diego Garc´ KenanFlagler, Philip Glass Corp.

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