I am having a hard time understanding 3.14 in MFE (9th edition, 8th printing)
So the answer is: Delta = (Cu-Cd)/(Su-Sd) * e^(-.015) = (18-11)/(55-45) * e^(-.015)
But how can we use a call option that expires some time after 6 months? I thought delta was like the slope of (payoff of option)/(stock price at expiration) * (deduct for reinvested dividends) that matches the binomial tree- so wouldn't using two different values that don't correspond to the option payoffs with Su and Sd mess up what delta should be?
Quote:
You are given the following binomial tree, with a period of 6 months, for stock prices. On the tree are prices for a European call option on the stock that expires at some time later than 6 months. Stock Price: 55 Option Value: 18 Stock Price : 60 Stock Price: 45 Option Value: 11 The continuously compounded risk-free interest rate is 5%. The stock pays continuous dividends proportional to its price at a rate of 3% Determine the number of shares in the replicating portfolio for the option at the initial node |
So the answer is: Delta = (Cu-Cd)/(Su-Sd) * e^(-.015) = (18-11)/(55-45) * e^(-.015)
But how can we use a call option that expires some time after 6 months? I thought delta was like the slope of (payoff of option)/(stock price at expiration) * (deduct for reinvested dividends) that matches the binomial tree- so wouldn't using two different values that don't correspond to the option payoffs with Su and Sd mess up what delta should be?
ASM MFE 3.14
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