Derivatives & Risk Management (DRM)

Assignment Three
Submit hard copy of the answer scripts by 15-Sept-2010 5:00PM

Questions:

1. Assume that the stock price (S0 ) is 50, strike (X) is 50, Rf = 6% , σ = 0.15
and T = 0.25. Calculate call and put option prices under each of the
following situation. Plot them graphically and comment on it. (For each
of the values the call and put price needs to be recalculated) [15 points]
(a) S0 = 42, 44, 46, 48, 50, 52, 54, 56, 58 and 60
(b) σ = 0.13, 0.14, 0.15 and 0.16
(c) T = 90 days, 120 days and 180 days.
2. Assuming the same values as above question recalculate the delta of call
and put option for each of the following strike prices : X = 42, 44, 46, 48,
50, 52, 54, 56, 58 and 60. Plot the deltas graphically and comment on it.
[5 points]
3. Find the value of a European call option using the Black-scholes option
pricing model. The parameters are S = 80, E = 80, rf = 0.05, σ = 0.35
and T = 0.25. Determine the delta and estimate the change in the call
price if the stock goes to the following prices: 70, 75, 78, 79, 81, 82, 85, 90.
Then compute the Black-Scholes values for each of the these new stock
prices. Compare your estimates with the actual prices, and comment on
the differences. [10 points]
4. Eight months ago, an investor borrowed money at the risk-free interest rate
to purchase a one-year 75-strike European call option on a nondividend-
paying stock. At that time, the price of the call option was 8. Today, the
stock price is 85. The investor decides to close out all positions. You are
given:
(a) The continuously compounded risk-free rate interest rate is 5%.
(b) The stocks volatility is 26%.

Calculate the eight-month holding profit. [10 points]

5. Following are the put options on Nifty traded on 08-Sep-2010. Assume
risk free rate as 6%. Calculate the implied volatility for each of the strike
prices and graph them. (Y-axis: Implied Volatility, X-axis: Strike Price)
[10 Points]

1
Trade Dt Expiry Dt Strike-Price Put Price Index
8-Sep-10 30-Sep-10 4900 2.8 5607.85
8-Sep-10 30-Sep-10 5000 3.55 5607.85
8-Sep-10 30-Sep-10 5100 4.5 5607.85
8-Sep-10 30-Sep-10 5200 6.55 5607.85
8-Sep-10 30-Sep-10 5300 11.25 5607.85
8-Sep-10 30-Sep-10 5400 21.9 5607.85
8-Sep-10 30-Sep-10 5500 39.9 5607.85
8-Sep-10 30-Sep-10 5600 70.95 5607.85
8-Sep-10 30-Sep-10 5700 125.25 5607.85