Beruflich Dokumente
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t = 0.3
_
1
252
= 0.0189, or 1.89%.
13.4 Calculate the price of a 3-month European put option on a non-dividend-
paying stock with a strike price of $50 when the current stock price is $50, the
risk-free interest rate is 10% per annum, and the volatility is 30% per annum.
The price of a European put option is given by the formula
p = Ke
rT
N(d
2
) S
0
N(d
1
),
where
d
1
=
ln
_
S
0
K
_
+
_
r +
2
2
_
T
T
d
2
=
ln
_
S
0
K
_
+
_
r
2
2
_
T
T
.
In our case, S
0
= 50, K = 50, r = 0.1, = 0.3, and T = 0.25. Thus,
d
1
=
ln
_
50
50
_
+
_
0.1 +
0.3
2
2
_
0.25
0.3
0.25
= 0.2417
d
2
=
ln
_
50
50
_
+
_
0.1
0.3
2
2
_
0.25
0.3
0.25
= 0.0917,
and, therefore,
p = 50e
0.10.25
N(0.0917) 50N(0.2417)
= 50e
0.10.25
1
2
_
0.0917
x
2
2
dx 50
1
2
_
0.2417
x
2
2
dx
= 50e
0.10.25
0.4634 50 0.4045
= $2.37.
1
13.6 What is implied volatility? How can it be calculated?
Implied volatility is the volatility that makes the Black-Scholes price of an option equal to
its market value. It can be calculated by solving the nonlinear equation obtained by setting
the Black-Scholes price equal to the market price. This equation can be solved using an
interative method, such as the Newton-Raphson method.
13.7 A stock price is currently $40. Assume that the expected return from
the stock is 15% and that its volatility is 25%. What is the probability distribu-
tion for the rate of return (with continuous compounding) earned over a 2-year
period?
The rate of return with continuous compounding earned over a period T follows the distri-
bution
2
2
,
T
_
,
where is the expected return from the stock and is the stocks volatility. In our case,
= 0.15, = 0.25, and T = 2. Therefore, the probability distribution of the rate of return
earned over a period of 2 years is
_
0.15
0.25
2
2
,
0.25
2
_
= (0.11875, 0.1768),
i.e. the expected value of the return is 11.875% per annum and the standard deviation is
17.68% per annum.
13.9 Using the notation in this chapter, prove that a 95% condence interval
for S
T
is between
S
0
e
2
2
T1.96
T
and S
0
e
2
2
T+1.96
T
.
From (13.3) we know that ln S
T
has the probability distribution
_
ln S
0
+
_
2
2
_
T,
T
_
.
Therefore, a 95% condence interval for ln S
T
is
_
ln S
0
+
_
2
2
_
T 1.96
T, ln S
0
+
_
2
2
_
T + 1.96
T
_
.
A 95% condence for S
T
is, therefore,
_
e
ln S
0
+
2
2
T1.96
T
, e
ln S
0
+
2
2
T+1.96
T
_
,
i.e.
_
S
0
e
2
2
T1.96
T
, S
0
e
2
2
T+1.96
T
_
.
2
13.11 Assume that a non-dividend-paying stock has an expected return of
and a volatility of . An innovative nancial institution has just announced
that it will trade a security that pays o a dollar amount equal to ln S
T
at time
T, where S
T
denotes the value of the stock price at time T.
(a) Use risk-neutral valuation to calculate the price of the security at time t in
terms of the stock price, S, at time t.
From (13.3), the expected value of ln S
T
at time t is
ln S +
_
2
2
_
(T t).
The expected value of ln S
T
in a risk-neutral world is, therefore,
ln S +
_
r
2
2
_
(T t),
since in a risk-neutral world the expected return is equal to the risk-free rate. Using risk-
neutral valuation the value of the security at time t is
e
r(Tt)
_
ln S +
_
r
2
2
_
(T t)
_
.
(b) Conrm that your price satises the dierential equation (13.16).
Let
f = e
r(Tt)
_
ln S +
_
r
2
2
_
(T t)
_
.
Then,
f
t
= re
r(Tt)
_
ln S +
_
r
2
2
_
(T t)
_
e
r(Tt)
_
r
2
2
_
f
S
=
e
r(Tt)
S
2
f
S
2
=
e
r(Tt)
S
2
.
Substituting in the left-hand side of the Black-Scholes equation, we obtain
f
t
+ rS
f
S
+
1
2
2
S
2
2
f
S
2
= e
r(Tt)
_
r ln S + r
_
r
2
2
_
(T t)
_
r
2
2
_
+ r
2
2
_
= re
r(Tt)
_
ln S +
_
r
2
2
_
(T t)
_
= rf,
i.e. f satises the Black-Scholes equation.
3
13.13 What is the price of a European call option on a non-dividend-paying
stock when the stock price is $52, the strike price is $50, the risk-free interest
rate is 12% per annum, the volatility is 30% per annum, and the time to maturity
is 3 months?
The price of a European call option is given by the formula
c = S
0
N(d
1
) Ke
rT
N(d
2
),
where
d
1
=
ln
_
S
0
K
_
+
_
r +
2
2
_
T
T
d
2
=
ln
_
S
0
K
_
+
_
r
2
2
_
T
T
.
In our case, S
0
= 52, K = 50, r = 0.12, = 0.3, and T = 0.25. Thus,
d
1
=
ln
_
52
50
_
+
_
0.12 +
0.3
2
2
_
0.25
0.3
0.25
= 0.5365
d
2
=
ln
_
52
50
_
+
_
0.12
0.3
2
2
_
0.25
0.3
0.25
= 0.3865,
and, therefore,
c = 52N(0.5365) 50e
0.120.25
N(0.3865)
= 52
1
2
_
0.5365
x
2
2
dx 50e
0.120.25
1
2
_
0.3865
x
2
2
dx
= 52 0.7042 50e
0.03
0.6504
= $5.06.
13.17 With the notation used in this chapter:
(a) What is N
(x)?
Since N(x) is the cumulative probability that a variable with a standardized normal dis-
tribution will be less than x, N
(x) =
1
2
e
x
2
2
.
(b) Show that SN
(d
1
) = Ke
r(Tt)
N
(d
2
), where S is the stock price at time t
and
d
1
=
ln
_
S
K
_
+
_
r +
2
2
_
(T t)
T t
d
2
=
ln
_
S
K
_
+
_
r
2
2
_
(T t)
T t
.
4
SN
(d
1
) = SN
(d
2
+
T t)
=
S
2
exp
_
d
2
2
2
d
2
T t
1
2
2
(T t)
_
= SN
(d
2
) exp
_
d
2
T t
1
2
2
(T t)
_
= SN
(d
2
) exp
_
ln
_
S
K
_
_
r
2
2
_
(T t)
1
2
2
(T t)
_
= SN
(d
2
)
K
S
e
r(Tt)
= Ke
r(Tt)
N
(d
2
).
(c) Calculate
d
1
S
and
d
2
S
.
d
1
S
=
K
S
1
K
T t
=
1
S
T t
d
2
S
=
1
S
T t
as well.
(d) Show that when
c = SN(d
1
) Ke
r(Tt)
N(d
2
)
it follows that
c
t
= rKe
r(Tt)
N(d
2
) SN
(d
1
)
2
T t
where c is the price of a call option on a non-dividend-paying stock.
c
t
= SN
(d
1
)
d
1
t
rKe
r(Tt)
N(d
2
) Ke
r(Tt)
N
(d
2
)
d
2
t
.
Using the result from (b), we obtain
c
t
= rKe
r(Tt)
N(d
2
) + SN
(d
1
)
_
d
1
t
d
2
t
_
.
d
1
d
2
=
T t =
d
1
t
d
2
t
=
2
T t
.
Therefore,
c
t
= rKe
r(Tt)
N(d
2
) SN
(d
1
)
2
T t
.
(e) Show that
c
S
= N(d
1
).
Dierentiating the Black-Scholes formula for the price of a call option with respect to S we
obtain
c
S
= N(d
1
) + SN
(d
1
)
d
1
S
Ke
r(Tt)
N
(d
2
)
d
2
S
.
5
Using that SN
(d
1
) = Ke
r(Tt)
N(d
2
) from (b) and
d
1
S
=
d
2
S
from (c), we obtain
c
S
= N(d
1
) + Ke
r(Tt)
N
(d
2
)
d
2
S
Ke
r(Tt)
N
(d
2
)
d
2
S
= N(d
1
).
(f ) Show that c satises the Black-Scholes dierential equation.
2
c
S
2
= N
(d
1
)
d
1
S
= N
(d
1
)
1
S
T t
.
Substituting the results from (d) and (e) in the left-hand side of the Black-Scholes dier-
ential equation, we obtain
c
t
+ rS
c
S
+
1
2
2
S
2
2
c
S
2
= rKe
(Tt)
N(d
2
) SN
(d
1
)
2
T t
+ rSN(d
1
)
+
1
2
2
S
2
N
(d
1
)
1
S
T t
= r
_
SN(d
1
) Ke
r(Tt)
N(d
2
)
= rc.
Therefore, c satises the Black-Scholes dierential equation.
(g) Show that c satises the boundary condition for a European call option,
i.e. that c = max(S K, 0) as t T.
Let us rst consider what happens to d
1
and d
2
as t T.
lim
tT
d
1
= lim
tT
ln
_
S
K
_
+
_
r +
2
2
_
(T t)
T t
= lim
tT
ln
_
S
K
_
T t
+ lim
tT
_
r +
2
2
_
T t
= ln
_
S
K
_
lim
tT
1
T t
.
If S > K, ln
_
S
K
_
> 0, and
lim
tT
d
1
= +.
Similarly, for S > K,
lim
tT
d
2
= +.
Then,
lim
tT
N(d
1
) = lim
tT
N(d
2
) =
1
2
_
x
2
2
dx = 1,
6
and
lim
tT
c = S K > 0.
If S < K, ln
_
S
K
_
< 0 and
lim
tT
d
1
= lim
tT
d
2
= .
In this case
lim
tT
N(d
1
) = lim
tT
N(d
2
) = 0,
and
lim
tT
c = 0.
If S = K,
lim
tT
d
1
= lim
tT
d
2
= 0,
and
lim
tT
c = SN(0) KN(0) = 0.
Therefore, as t T,
c max(S K, 0).
13.18 Show that the Black-Scholes formulas for call and put options satisfy
put-call parity.
p + S
0
= Ke
rT
N(d
2
) S
0
N(d
1
) + S
0
= Ke
rT
N(d
2
) S
0
(1 N(d
1
)) + S
0
= Ke
rT
N(d
2
) + S
0
N(d
1
).
Also,
c + Ke
rT
= S
0
N(d
1
) Ke
rT
N(d
2
) + Ke
rT
= S
0
N(d
1
) Ke
rT
(1 N(d
2
)) + Ke
rT
= Ke
rT
N(d
2
) + S
0
N(d
1
).
Therefore, p + S
0
= c + Ke
rT
, and the Black-Scholes formulas satisfy put-call parity.
7