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MAT2094 Tutorial 4(2)

The document contains a series of questions related to derivative securities, focusing on various options pricing scenarios using the Black-Scholes framework. It includes calculations for exotic options, such as gap options, forward start options, and chooser options, along with their respective parameters like stock prices, volatility, and interest rates. Answers to the questions are provided at the end, summarizing the results of the calculations.

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Shehan De Silva
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4 views

MAT2094 Tutorial 4(2)

The document contains a series of questions related to derivative securities, focusing on various options pricing scenarios using the Black-Scholes framework. It includes calculations for exotic options, such as gap options, forward start options, and chooser options, along with their respective parameters like stock prices, volatility, and interest rates. Answers to the questions are provided at the end, summarizing the results of the calculations.

Uploaded by

Shehan De Silva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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SCHOOL OF MATHEMATICAL SCIENCES

MAT 2094 DERIVATIVE SECURITIES II


(TUTORIAL 4B – EXOTIC OPTIONS II)
Question 1

For a stock whose price at time t is S (t ), you are given:

(i) The stock’s price follows the Black-Scholes framework.


(ii) S (0) = 50.
(iii) The stock pays continuous dividends proportional to its price at a rate of 0.02.
(iv) The annual volatility of the stock is 0.1.
(v) The continuously compounded risk-free interest rate is 0.03.

An option will pay, at the end of one year,

(i) 30 if S (1)  50;


(ii) 20 if 50  S (1)  60;
(iii) 0 if S (1)  60

Determine the price of the option.

Question 2

For a stock whose price at time t is S (t ), you are given:

(i) S (0) = 50.


(ii) The stock’s price follows the Black-Scholes framework.
(iii) The stock pays continuous dividends proportional to its price at a rate of 0.01.
(iv) The continuously compounded risk-free interest rate is 0.08.

An option will pay S (1) at the end of one year if S (1)  70. Otherwise, it will pay nothing. The
price of this option is 2.35. Determine the volatility of the stock.

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies


SCHOOL OF MATHEMATICAL SCIENCES

Question 3

Consider the following portfolio of options purchased on Day 0:

(i) 3-day Asian arithmetic average price call, strike price 56.
(ii) 3-day Asian arithmetic average strike put.
(iii) 3-day up-and-in barrier call with barrier 60, strike price 50.
(iv) 3-day up-and-in barrier put with barrier 60, strike price 50.
(v) 3-day gap put option with trigger 60, strike price 50.
(vi) 3-day gap call option with trigger 40, strike price 52.

The stock prices from Day 0 to Day 3 are 52, 66, 58, and 47 respectively. Calculate the total payoff
on Day 3 from the portfolio of options.

Question 4

For a 6-month European gap put option on a stock:

(i) The stock’s price is 65.


(ii) The trigger is 60.
(iii)  = 0.25.
(iv) The continuous annual dividend rate for the stock is 0.02.
(v) The continuously compounded risk-free interest rate is 0.06.
(vi) Options are priced using the Black-Scholes formula.

Determine the strike price to make the option price 0.

Question 5

For a 1-year US dollar-denominated European gap call option on Canadian dollars:

(i) The spot exchange rate is 0.9USD/CAD.


(ii) The strike price is 0.85.
(iii) The trigger is 0.95.
(iv) The continuously compounded risk-free interest rate for USD is 5%.
(v) The continuously compounded risk-free interest rate for CAD is 7%
(vi) The volatility of the exchange rate of CAD to USD is 10%.

Determine the Black-Scholes option premium.

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies


SCHOOL OF MATHEMATICAL SCIENCES

Question 6

For a 1-year European exchange option, you are given:

(i) Stock A has price S0 = 50.


(ii) Stock B has price Q0 = 60.
(iii) The option allows acquiring Stock B by paying 1.2 S1 , where S1 is the price of Stock A at
expiry.
(iv) Stock A pays dividends at a continuous annual rate of 0.02.
(v) Stock B pays dividends at a continuous annual rate of 0.05.
(vi) Stock A has annual volatility 0.4.
(vii) Stock B has annual volatility 0.2.
(viii) The correlation between the two stocks is 0.8.
(ix) The continuously compounded risk-free interest rate is 0.04.

Determine the Black-Scholes premium for the option.

Question 7

S (t ) is the time-t price of stock S, and Q(t ) is the time-t price of stock Q. You are given:

(i) S and Q follow the Black-Scholes framework.


(ii) S (0) = 80.
(iii) Q(0) = 51.
(iv) S pays dividends of 0.05S (t ) dt between times t and t + dt.
(v) Q does not pay dividends.
(vi) The volatility of S is 0.2.
(vii) The volatility of Q is 0.5.
(viii) The correlation of S and Q is -0.35.
(ix) The continuously compounded risk-free rate is 0.02.

A special security will pay max ( S (4), Q(4) ) at the end of 4 years. Calculate the value of the special
security at time 0.

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies


SCHOOL OF MATHEMATICAL SCIENCES
Question 8

For a stock, you are given:

(i) The stock’s price is 95.


(ii) The stock pays continuous dividends proportional to its price at a rate of 3%.
(iii) The continuously compounded risk-free interest rate is 3%.

An option allows you to choose, at the end of 9 months, between 100-strike European put and call
options expiring at the end of 12 months from now.

You are given the following prices for European call options with strike price 100:

Expiry (in months) Price


3 7.25
6 9.75
9 10.60
12 10.90

Determine the value of the chooser option.

Question 9

For a nondividend paying stock, you are given:

(i) The stock’s price is 75.


(ii) The stock’s volatility is 25%.
(iii) The continuously compounded risk-free interest rate is 6%.

An option allows you to choose, at the end of 1 month, between at-the-money European call and
put options expiring at the end of 3 months from now.

Using the Black-Scholes framework, calculate the value of this chooser option.

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies


SCHOOL OF MATHEMATICAL SCIENCES
Question 10

A forward start option will give its owner a 3-month European call option with a strike price equal
to the stock price one year from today. You are given:

(i) The European call option is on a stock that pays no dividends.


(ii) The stock’s volatility is 28%.
(iii) The forward price for delivery of 1 share of stock 1 year from today is 100.
(iv) The continuously compounded risk-free interest rate is 5%.

Using the Black-Scholes framework, determine the price of the forward start option today.

Question 11

A forward start option will, in one year from today, give its owner a 1-year European put option
with a strike price equal to 105% of the stock price at that time. You are given:

(i) The stock’s continuously compounded dividend rate is 2%.


(ii) The stock’s volatility is 30%.
(iii) The current price of one share of stock is 60.
(iv) The continuously compounded risk-free interest rate is 0.06.

Using the Black-Scholes, determine the price of the forward start option today.

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies


SCHOOL OF MATHEMATICAL SCIENCES
Answers:

1. 23.328

2. 0.153

3. 12

4. 53.73

5. 0.0320

6. 5.35

7. 85.05

8. 26.27

9. 5.9248

10. 5.89

11. 7.16

MAT 2094 Derivative Securities II BSc (Hons) in Actuarial Studies

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