Mr. Franklin wants to know how the put option in Exhibit 1 behaves when all the parameters are held constant except delta. Which of the following is the best estimate of the change in the put option€™s price when the underlying equity increases by $1?
a. $0.33
b. €“$0.33
c. €“$3.61

Ronald Franklin, CFA, is responsible for developing a new investment strategy for his firm. Given recent poor performance, the firm wants all of its equity portfolio managers to overlay options on all positions.

Mr. Franklin gained experience with basic option strategies at his previous job. As an exercise, he decides to review the fundamentals of option valuation using a simple example. Mr. Franklin recognizes that the behavior of an option€™s value is dependent on many variables and decides to spend some time closely analyzing this behavior, particularly in the context of the Black-Scholes option pricing model (and assuming continuous compounding). His analysis resulted in the information shown below:

Exhibit 1: Input for Option Pricing
Stock price ......................................................$100
Strike price .....................................................$100
Interest rate ......................................................7%
Dividend yield ...................................................0%
Time to maturity (years) .................................1.0
Standard deviation of stock .........................0.20

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Exhibit 2: Option Sensitivities Call Put Delta -0.3264 0.6736