DU Finance Stock and Pricing Question
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
DU Finance Stock and Pricing Question
A European put option provides the right to sell a stock at a pre-specified strike price 𝐾 at maturity date 𝑇 − 𝑡. The Black-Scholes equation for pricing a put option is given as follows (see attached” equation.png”)
- a) You want to know the correct price for a put option with 26 weeks until expiration (assume 52 weeks in a year). The current stock price is 𝑆 = $20.50, and the strike price on the put option is 𝐾 = $19. The stock has an annualized volatility of 𝜎 = 0.20 and the corresponding annual risk- free rate is 𝑟𝑓 = 0.03. What is the correct price for this put option?
- b) What is the price of a call option on the same underlying stock with the same maturity and strike price? (Note: the call option equation was provided in the Week 13 slides.) Why is the call option more expensive than the put option?
- c) Suppose that you own 900 put option contracts, where each contract represents 100 shares. What is your delta position? How many shares do you need to buy or sell to achieve delta neutrality? For this question, you will first need to calculate the delta of a put option, which is given as follows:
Δ = −(−𝑑1)
- d) Assume the option position and delta-neutral share position from part (c). Following an earnings announcement on that day, uncertainty in the stock price skyrockets to 𝜎 = 0.40. The stock price, however, remains unchanged (𝑆 = $20.50). Calculate the new delta position following this change in uncertainty. How many shares do you need to buy or sell (relative to your share position from part (c)) to achieve delta neutrality?
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