hw3 - Introduction to derivatives Fall 2011 BUSI 588...

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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 4-month maturity on the or down by 20% each 2-months, and that it is currently trading for $100. The risk-free 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 90-day T-bill (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 Black-Scholes value of a 90-day 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 Black-Scholes?
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hw3 - Introduction to derivatives Fall 2011 BUSI 588...

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