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MAFS5030 hw3 004
MAFS5030 hw3 004
MAFS5030 hw3 004
Consider the value of a European call option written by an issuer who holds only up to
α (< 1) units of the underlying asset. As a result, the terminal payoff of this call is then
given by
and zero otherwise. Show that the value of this European call option is given by
( )
X
cL (S, τ ; X, α) = c(S, τ ; X) − (1 − α)c S, τ ; , α < 1,
1−α
( )
X X
where c S, τ ; is the value of a European vanilla call with strike price . Show
1−α 1−α
that the delta of this European call is always less than α.