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) = 65. (ii)

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) = 65.

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

(iii) The stock’s volatility is 25%.

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

Consider a special 1-year European “truncated” call option with payoff given by

Payoff= S(1)-60, 0, if 60 S(1) 80, otherwise.

Calculate the time-0 delta of this special call option.  

Payoff= S(1)-60, 0, if 60 S(1) 80, otherwise.

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