Solutions Manual

This Solutions Manual includes answers to all of the end of chapter problems found in this book (except for a few coding problems where the numerical answer is provided in the text).

Chapter 1: Exotic Derivatives

1.1 “Free” Option

  1. The option is not really free because we may end up at a loss at and above the strike price. (See Figure S.1.)
  2. The replicating portfolio would include selling x digital calls struck at K at price p and buying a vanilla call struck at K for the premium of m. In order for the portfolio to have zero cost we must have both01-math-0001.
  3. The cost of one digital call using the Black-Scholes model with the given parameters is $0.5398. The premium of the vanilla call from the Black-Scholes model is $7.97. Solving for x we get both01-math-0002.
A graph depicting steep rise of stock price. Strike price is indicated by K.

Figure S.1 “Free” option payoff.

1.2 Autocallable

Answer: both01-math-0003.

1.3 Geometric Asian Option

  1. From Ito-Doeblin we have both01-math-0004 where α = r − q − ½σ2. Substituting into the definition of AT we get:
  2. which yields the required expression for A

Get Advanced Equity Derivatives: Volatility and Correlation now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.

Start your free trial