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.

Consider a 9-month European contingent claim on the stock. You are given:

(i) The stock’s volatility is 35%.

(ii) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 2%.

(iii) The continuously compounded risk-free interest rate is 6%.

(iv) The 9-month payoff of the contingent claim is as follows:

Payoff 20 S(0) slope = 1 S(0.75)

(v) The current gamma of the contingent claim is 0.0314.

Calculate the time-0 contingent-claim elasticity.

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:17 AM

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

Question:

Payoff 20 S(0) slope = 1 S(0.75)

Step by Step Answer:

The contingent claim is composed of a long 9month zerocou...View the full answer

Derivative Pricing

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