# Quizz3(2) - Financial Risk Management Exercises Jos Da...

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Financial Risk Management Exercises. Jos´ e Da Fonseca email: [email protected] Auckland University of Technology First Name: Family Name: Id Number: Exercise I (20 marks) t = 0 t = T 3 t = 2 T 3 t = T S % & uS dS % & % & u 2 S udS d 2 S % & % & % & u 3 S u 2 dS ud 2 S d 3 S with S = 1, u = 1 . 1, d = 0 . 9. We denote by t = 0 t = T 3 t = 2 T 3 t = T C % & C u C d % & % & C uu C ud C dd % & % & % & C uuu C uud C udd C ddd the evolution of a Call option with strike K , maturity T and we suppose that the rate (CC) is r = 2%. 1. (5 marks) Compute the price of this option with strike K = 1 . 1 and maturity T = 1. 2. (5 marks) Compute the evolution of the Delta along the tree. 3. (5 marks) Suppose that you sell one option at time
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Unformatted text preview: t = 0 and you do not hedge, you keep the premium at the rate r . What is you global position at time T (depending on the stock value at that date)? 4. (5 marks) Suppose that you sell one option at time t = 0 and you take a position on the stock equals to the Delta Δ (at that date). How much do you need to borrow in order to build the hedging portfolio? What is your global position at time T depending on the stock value at that date? 1...
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