FIN 530 Derivatives George O.

Aragon
Final Exam Fall 2016
Total points: 100

Please write your name here:

1. [5 points] A 3-month put option is currently selling for $12. A moment later, the
stock price increases, but the put still sells for $12. What has happened to the put’s
implied volatility?

2. [5 points] A 3-month call option is currently selling for $10. A month later, the
stock price is unchanged, but the call still sells for $10. What has happened to the
call’s implied volatility?
3. A stock price is currently $100. In any year, the price can increase by a factor of
1.10, or fall by a factor of 0.90. The stock pays no dividends. The risk-free rate is
5%.

a. [15 points] Find the value of a European put option with strike price 105 and
time to expiration of two years.

b. [5 points] What is the elasticity of the European put at the current stock price?
4. [10 points] Now suppose the option in problem 3 is American. What is its value
today? At what nodes are early exercise optimal?
5. An options market maker currently has the following portfolio of over-the-counter
options on a particular stock:
Type Position Delta Gamma
Call -1000 0.5 2.2
Put + 500 -0.3 0.6
Put -2000 -0.4 1.3

a. [12.5 points] What is the delta and gamma of the overall position?

b. [7.5 points] A traded option is available which has a delta of 0.8 and a gamma
of 1.5. What positions in that traded option and underlying stock would make
the portfolio both gamma neutral and delta neutral?
 6. In this problem, you will need the following table of N(d) to provide inputs for a
Black-Scholes analysis. For values of d1 and d2 that do not correspond exactly to
values in the table, simply round off d1 or d2 to the nearest entry on the table. Also,
use the approximation that when X and S are close, ln(S/X) equals the percentage
difference between S and X, expressed as a decimal. For example, ln(97/100) =
ln(.97) ≈ –.03.

0 0.500 0.55 0.709

0.05 0.520 0.60 0.726
0.10 0.540 0.65 0.742
0.15 0.560 0.70 0.758
0.20 0.579 0.75 0.773
0.25 0.599 0.80 0.788
0.30 0.618 0.85 0.802
0.35 0.637 0.90 0.816
0.40 0.655 0.95 0.829
0.45 0.674 1.00 0.841
0.50 0.691 1.05 0.853

Suppose that your firm has issued a three-year maturity European put option with an exercise
price of $100 on a mutual fund. [Assume for simplicity that it has issued the put on one share
of the fund.] Your assignment is to delta hedge the put option. The fund currently sells for
$100 per share. It has a standard deviation of 20% per year and T-bills pay 4% per year. The
portfolio pays no dividends.
a. [10 points] What is the value of the put option?

b. [5 points] What initial position in the stock portfolio is required to make your
overall position delta neutral?

c. [5 points] Suppose the value of shares in the mutual fund falls by 2% on the first
day of trading. After rebalancing, what should be your position in the stock
portfolio?
7. A call option with X=90 sells for $6 which is consistent with stock volatility of
20%. The delta of the call is 0.6. A put option on the same stock has identical
maturity and exercise price and sells for $3, which is also consistent with stock
volatility of 20%.

a. [7.5 points] Suppose you believe that the volatility of the underlying stock will
actually be 21%, and you buy a straddle (i.e., long 1 call and long 1 put) to
speculate on your belief. What will be the delta of your position?

b. [7.5 points] Instead of a straddle, you decide to establish a delta-neutral

portfolio that will profit if the implied volatility on both options increases to
21%. What is the appropriate ratio of calls to puts? Will you be long or short
each option?

c. [5 points] Will you gain or lose on your position if the implied volatility of the
options after a month is still 20%? Suppose the stock price hasn’t changed.