Question #47 - Reading 31 Valuation of Contingent Claims

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 21

Status: Unattempted

Shared Context

- 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? A) −$0.37. B) −$0.33. C) −$3.61.

Question

Franklin wants to know if the option sensitivities shown in Exhibit 2 have minimum or maximum bounds. Which of the following are the minimum and maximum bounds, respectively, for the put option delta?

Answer Choices:

A. −1 and 1

B. There are no minimum or maximum bounds

C. −1 and 0

Explanation

The lower bound is achieved when the put option is far in the money so that it moves exactly in the opposite direction as the stock price. When the put option is far out of the money, the option delta is zero. Thus, the option price does not move even if the stock price moves since there is almost no chance that the option is going to be worth something at expiration.

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