Siddharth Gala

Project part 1
 Pay off Diagram

 
 
Payoff

Profit

 
 
 
 
 
               
  1 2 3 4 5 6 E
 
Loss

 
 
13.

0<St<5
St 5 0<St<60 0<St<75 St>75
0.02(St - 0.02(St - 55)+0.01(St - 0.02(St - 55) + 0.01(St - 60) + (0.01(St
Payoff 0 55) 60) - 75)

There are three option with the following strike price : E1 = $55, E2 = $60, E3 = $75
Using Black Scholes Model

C = SN(d1) – e^rfT EN(d2)

S ( rf + 0.5 σ 2 ) T
d1 = ln E + σ √T

d2 = d1 - σ √T

(i) 2% of any price appreciation in the price of the stock up to $60 per share;

S = 55
E = 60
Risk free = 10%
Volatility = 50%
Time = 3 years

Using the formula, we get,

 ln ( 5555 )+( 0.1+ 0.5∗( 0.5) )∗3
2

0.5 √ 3

N ( 0.779 )=0.782

d 2=0.779−0.5 √ 3=−0.087

N (−0.087 ) =0.465

C 1=55 ×0.789−e−0.1×3 ×55 ×0.465=$ 24.051

(ii) 3% of any price appreciation above $60 but less than $75 per share;
We understand this as call option with strike price at 60 and the non-cumulative payoff =1%

ln ( 5560 )+( 0.1+0.5∗( 0.5) )∗3

2

0.5 √ 3

N ( 0.678 )=0.751

d 2=0.678−0.5 √ 3=−0.187

N (−0.187 ) =0.425

C 1=55 ×0.751−e−0.1× 3 × 55 ×0.425=$ 22.40

(iii) 4% of any price appreciation above $75 per share;

We understand this as call option with strike price at 75 and the non-cumulative payoff =1%

ln ( 5575 )+( 0.1+ 0.5∗( 0.5) )∗3

2

0.5 √ 3

N ( 0.421 )=0.663
 d 2=0.421−0.5 √ 3=−0.444

N (−0.444 )=0.328

C 1=55 ×0.663−e−0.1 ×3 ×55 ×0.328=$ 18.24

V =10,000,000 × ( 0.02× 24.051+ 0.01× 22.401+ 0.01×18.239 )=$ 8,874,234

The package is worth $8,874,234

17.
1. Using Black Scholes model

d 1=
ln ( es ) (rf +0.5 σ ) T
2

σ √T

d2 = d 1−σ √ T
Price of the European call option

100

di=
( ( )(
ln
100 )
+ 0.12+ 0.5 ( 0.6 )2 )∗0.25
= 0.25
0.6 √ 0.25
D1 = 0.25

d2= -0.05
Nd1= 0.59871

Nd2=0.48006
 C=100*0.59871-100*e (-0.12*0.25) *0.48006= 13.28

value of a put on XYZ with the same E and same time to maturity as the call?

N-d1= 0.40129

N-d2=0.51994

C=100*0.40129-100*e (-0.12*0.25) * 0.51994= 10.33

American Put with Binomial

Data  
1.16183
S 100 u 4
0.86070
E 177.2119 d 8
T 0.25
rf 0.03
Sigma 0.6
n 4

t+2delta t+3delta
t t+delta t   t   t   t+4delta
182.211
9

156.831
2
134.985
9
 134.985 134.985
9 9
116.183
4

100

134.985
9
116.183
116.1834 4
100 100
100
86.0708

74.0818
100 2

134.985
9
116.183
4
100 100
86.0708 100
86.0708

74.0818
2

100
86.0708
74.0818
2
74.0818
2
 74.0818
2

63.7628
2

54.8811
6

(Unable to construct part 4)