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Unformatted text preview: that for any a and b, V (s, t) = as + bert satisﬁes the Black-Scholes
di↵erential equation. What investment does this correspond to?
6.22. Find a formula for the value (at time 0) of cash-or-nothing option that
pays o↵ $1 if St > K and 0 otherwise. What is the value when the strike is
the initial value, the option is for 1/4 year, the volatility is = 0.3, and for
simplicity we suppose that the interest rate is 0.
6.23. On May 22, 1998 Intel was selling at 74.625. Use the Black-Scholes
formula to compute the value of a Janaury 2000 call (t = 1.646 years) with
strike 100, assuming the interest rate was r = 0.05 and the volatility = 0.375.
6.24. On December 20, 2011, stock in Kraft Foods was selling at 36.83. (a) Use
the Black-Scholes formula to compute the value of a March 12 call (t = 0.227
years) with strike 33, assuming an interest rate of r = 0.01 and the volatility
= 0.15. The volatility here has been chosen to make the price consistent with
the bid-ask spread of (3.9,4.0). (b) Is the pri...
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This document was uploaded on 03/06/2014 for the course MATH 4740 at Cornell University (Engineering School).
- Spring '10
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