Assume the Black-Scholes framework. For t 0, let S(t) be the time-t price of a stock.

Question:

Assume the Black-Scholes framework. For t ≥ 0, let S(t) be the time-t price of a stock. You are given:

(i) S(0) = $48.

(ii) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 3%.

(iii) Var[ln S(t)] = 0.04t for all t ≥ 0.

(iv) The continuously compounded risk-free interest rate is 4%.

Consider a 3-month European gap option. If the 3-month stock price is less than $48, the payoff of the option is K − S(0.25); otherwise, the payoff is zero.

The value of K is set so that the gap option is free (i.e., its price is zero).

Calculate the current delta of the gap option.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: