Christian-Albrechts-Universität zu Kiel SS 2020

Mathematisches Seminar
Prof. Dr. Sören Christensen
Adrian Theopold, Henrik Valett Sheet 05

Computational Finance
Exercises for all participants

Exercise 15
For a continuous stochastic process Z with Z > 0 we define the stochastic Logarithm L (Z)
by
1
L (Z)(t) = dZ(t) .
Z
Show that:

(a) E (L (Z)) = Z
Z0 ,

(b) L (E (X)) = X − X0 ,

where X is a continuous stochastic process with E (X) > 0.

Hint for part a): Use Itô’s formula on ln(Z)(t).

T-Exercise 16
For µ ∈ R and σ , r > 0 we consider the Black-Scholes market with bond B and stock price
process S which evolve according to

dBt = rBt dt, B0 = 1,

dSt = µSt dt + σ St dWt , S0 > 0.

(a) Calculate the Itô process representation of the cubic stock process Xt := St3 and the
associated quadratic variation process [X, X]t .

(b) Consider a self-financing portfolio ϕ = (ϕt0 , ϕt1 )t≥0 with initial value V0 (ϕ) = 1 that
t (ϕ)
always invests half of the wealth into the stock, i.e. ϕt1 = V2S t
. Show that the value
process Vt (ϕ) is a geometric Brownian motion.
C-Exercise 17 (Greeks of a European option in the Black-Scholes model)
In the ’Material’ folder of the OLAT you find a python function

V0 = BS_Price_Int (r, sigma, S0, T, g)

which computes the price of a European option with payoff g(S(T )) at maturity T > 0 in a
Black-Scholes model with initial stock price S(0) > 0, interest rate r > 0 and volatility σ > 0.
(That is forumula (3.21) from the lecture notes)
The first order greeks for a European option in the Black-Scholes model are given by the first
order derivatives
∂
∆(r, σ , S(0), T, g) = VBS (r, σ , S(0), T, g),
∂ S(0)
∂
ν(r, σ , S(0), T, g) = VBS (r, σ , S(0), T, g),
∂σ
∂2
γ(r, σ , S(0), T, g) = VBS (r, σ , S(0), T, g),
∂ S(0)∂ S(0)

where VBS (r, σ , S(0), T, g) denotes the Black-Scholes price of the European option.

a) Write a scilab function

[Delta, vega, gamma]=BS_Greeks_num(r, sigma, S0, T, g ,eps)

that computes the greeks described above numerically using the approximations

∂ f (x + εx, y) − f (x, y)
f (x, y) ≈ ,
∂x εx
∂2 f (x + εx, y) − 2 f (x, y) + f (x − εx, y))
f (x, y) ≈ .
∂ x∂ x (εx)2

For this use the function BS_Price_Int without adding it to your own code but by
executing the provided file (see hint).

b) Plot ∆(r, σ , S(0), T, g) for the European call with payoff function g(x) = (x − 100)+
and parameters r = 0.03, σ = 0.2, T = 1 for S(0) ∈ [60, 140]. Use ε = 0.001.

Hint: Add an empty __init__.py file to the directory containing the BS_Price_Int.py
and your solution file. Then use an import statement for the BS_Price_Int file.

Please comment your solution. Please include your name(s) as comment in the beginning
of the file.

Submit until: Thu, 21.05.2020, 8:30