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(1).Assume KBC stock is currently at S = $100. After one period, the price will move to one of the following two values: [uS and

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(1).Assume KBC stock is currently at S = $100. After one period, the price will move to one of the following two values: [uS and dS], where [u = 1.2; d = 0.9]. A $1.00 investment in the risk-free asset using continuous compounding will return $1.10 at the end of the period.

(a) Find the risk-neutral probabilities governing the movement of the stock price. (2 marks)

(b) For a strike price of 100 for call, find the delta of the call. (2 marks)

(c) For a strike of 100 for put, find the delta of the put. (2 marks)

(d) Compute the difference between the call delta and the put delta and explain the answer youGet. (6 marks)

(2).A bullish call spread is bullish on direction. Is it also bullish on volatility? Let?s assume the payoff diagram with exercise price is $95 and $100 for a call bull spread. Explain your answer. (3 marks)

image text in transcribed Assignment 2 Due date - Friday 27 May at 4pm Question 1 Assume KBC stock is currently at S = $100. After one period, the price will move to one of the following two values: [uS and dS], where [u = 1.2; d = 0.9]. A $1.00 investment in the risk-free asset using continuous compounding will return $1.10 at the end of the period. (a) Find the risk-neutral probabilities governing the movement of the stock price. (2 marks) (b) For a strike price of 100 for call, find the delta of the call. (2 marks) (c) For a strike of 100 for put, find the delta of the put. (2 marks) (d) Compute the difference between the call delta and the put delta and explain the answer you Get. (6 marks) Question 2 A bullish call spread is bullish on direction. Is it also bullish on volatility? Let's assume the payoff diagram with exercise price is $95 and $100 for a call bull spread. Explain your answer. (3 marks) IMPORTANT NOTE TO STUDENTS: - Please do not copy the above two questions completely in your assignment. Your assignment should simply state the question number then provide your solution/answer to the question. - No need to include a cover sheet BUT your student ID and full name must be shown in your assignment when you submit the assignment via 'tunritin'. - Hard copy submission is not accepted. Assignment must be submitted via 'turnitin

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