Option Valuation Methods - Assignment I -

2022/2023

Deadline: October 31, 2022

Please attach your code for the programming exercises at the end of
your report. The use of Latex/Word is strongly recommended. If we
can’t read your work, you won’t get points. Note that example codes
for the programming exercises are outlined in the book and on the
author’s website (matlab).

I (4p)
Simulate the SPX index based on the discrete time model with T = 1, S0 = 3400
and σ 2 = 0.0003 using either Matlab or Python.

(a) First set the number of time intervals L = 10. Plot the evolution of Sτ
for τ = nδt with n = 0, 1, . . . , L and δt = TL .

(b) Repeat the simulation 500 times, and store the simulated ST . Make a his-
togram of the simulated ST and calculate the sample mean and sample variance.

(c) Set L to different values and repeat the (b). Determine a value of L with
which the sample mean and sample variance are considered close enough to the
theoretical mean and theoretical variance.

(d) Simulate the SPX index according to the continuous time model.

II (3p)
Make exercises P7.1 and P7.2 from the book.

III (1p)
Show that the Black–Scholes formulas for call and put options satisfy call–put
parity.

1
IV (0.5p)
What is the price of a European put option when the stock price is 69, the
strike price is 70, the risk–free interest rate is 5% per annum, the volatility is
35% per annum, and the time to maturity is six months? Show your calculations
analytically (use the Black-Scholes formula) and verify this numerically with the
code from Chapter 8.

V (0.5p)
What is the price of a European call option 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 three months? Show your calculations
analytically (use the Black-Scholes formula) and verify this numerically with
the code from Chapter 8.

VI (1p)
Make exercise 8.10 from the book.