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Calculation of Delta

Calculation of Delta - – For options on futures contracts...

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Calculation of Delta Delta is the rate of change in option price over the rate of change in the price of the underlying asset. Delta is calculated using nodes at time t. An estimate of delta at time t is 1 Delta = - - = - 216 6 96 5612 44 55 0 41 . . . . .
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Trees and Dividend Yields When a stock price pays continuous dividends at rate q we construct the tree in the same way but set a = e ( r – q ) t For options on stock indices, q equals the dividend yield on the index For options on a foreign currency, q equals the foreign risk-free rate
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Unformatted text preview: – For options on futures contracts q = r 2 Binomial Tree for Dividend Paying Stock • Procedure : – Draw the tree for the stock price less the present value of the dividends. – Create a new tree by adding the present value of the dividends at each node. • This ensures that the tree recombines and makes assumptions similar to those when the Black-Scholes model is used. 3 Extensions of Tree Approach • Time dependent interest rates • The control variate technique 4...
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