Question #45

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 20

Status: Unattempted

Part of Context Group: Q45-47 First in Group
Shared Context
- Using the information in Exhibit 1, Franklin wants to compute the value of the corresponding European call option. Which of the following is the closest to Franklin's answer? A) $11.54. B) $4.78. C) $5.55.
Question
Franklin wants to know how the put option in Exhibit 1 behaves when all the parameters are held constant except the 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?
Answer Choices:
A. −$0.37
B. −$0.33
C. −$3.61
Explanation
The correct value is simply the delta of the put option in Exhibit 2. The incorrect value −$3.61 represents the change due to the volatility divided by 10 multiplied by −1. The incorrect value −$0.37 calculates the change by dividing the short-term interest rate divided by 100.
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