Scribd Logo
Upload

Welcome to Scribd!

  • Financial Calculus

    Uploaded by

    Maryam Yusuf
    20 views2 pages
    The document is an exam paper for a course in financial calculus. It contains 4 questions: 1) Prove the pricing formula for a fixed strike Asian option and the associated hedging portfolio using partial differential equations. 2) Calculate the prices of various option types (European call, put, American put, knock-in/out puts) in a two-period binomial model. 3) Show that the value of a chooser option is the sum of the values of a call and put with adjusted strike. 4) Draw the payoff diagrams for option trading strategies including a straddle, strange, and butterfly spread.

    Original Description:

    Financial calculus

    Original Title

    FINANCIAL_CALCULUS

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The document is an exam paper for a course in financial calculus. It contains 4 questions: 1) Prove the pricing formula for a fixed strike Asian option and the associated hedging portfolio using partial differential equations. 2) Calculate the prices of various option types (European call, put, American put, knock-in/out puts) in a two-period binomial model. 3) Show that the value of a chooser option is the sum of the values of a call and put with adjusted strike. 4) Draw the payoff diagrams for option trading strategies including a straddle, strange, and butterfly spread.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    20 views2 pages

    Financial Calculus

    Uploaded by

    Maryam Yusuf
    The document is an exam paper for a course in financial calculus. It contains 4 questions: 1) Prove the pricing formula for a fixed strike Asian option and the associated hedging portfolio using partial differential equations. 2) Calculate the prices of various option types (European call, put, American put, knock-in/out puts) in a two-period binomial model. 3) Show that the value of a chooser option is the sum of the values of a call and put with adjusted strike. 4) Draw the payoff diagrams for option trading strategies including a straddle, strange, and butterfly spread.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 2

    STRATHMORE INSTITUTE OF MATHEMATICAL SCIENCES

    BACHELOR OF BUSINESS SCIENCE (ACTUARIAL SCIENCE, FINANCIAL


    ECONOMICS AND FINANCIAL ENGINEERING)
    CAT I
    BSA 3214: FINANCIAL CALCULUS

    Date : 10/11/2021 Time: 1 hr 30 Min

    Instructions to Candidates

    1. This paper consists of FOUR Questions. Answer ALL the Questions in this
    paper.

    2. Mark allocations are shown in brackets.

    3. In addition to this paper you are provided with the 2002 edition of the Formulae
    Table.

    4. Use of an electronic Calculator is allowed for this CAT.

    1. Consider a fixed strike Asian option with payoff: (10marks)

    1ZT
    ( St dt − K)+ ,
    T 0

    at maturity time T. Here, K > 0 denotes the strike price. Let Y denote the
    stochastic process given by:
    Z t
    Yt = Su du, t ≥ 0,
    0

    and assume that (t, s, y) → v(t, s, y) is C 1,2,1 and satisfies the partial differential
    equation:

    ∂v(t, s, y) ∂v(t, s, y) ∂v(t, s, y) 1 2 2 ∂v 2 (t, s, y)


    + rs +s + σ s = rv(t, s, y),
    ∂t ∂s ∂y 2 ∂s2

    with boundary condition:

    y
    v(T, s, y) = ( − K)+ , s ≥ 0, y ≥ 0.
    T
    1
    Prove that the price of this Asian Option at time t is given by:

    Pt = v(t, St , Yt ), f or t ∈ [0, T ],

    and the associated hedging portfolio process π = (π B , π S ) is given by:

    πtS = St vs (t, St , Yt ), f or t ∈ [0, T ],

    and
    πtB = v(t, St , Yt ) − St vs (t, St , Yt ), f or t ∈ [0, T ].

    2. Consider a two-period binomial model, for an asset with initial price S0 = 120.
    The continuously compounded risk free rate per annum r = 5%. Assuming
    that the share price movements occur every 6 months with factors u = 1.2 and
    d = 0.8:

    (a) Calculate the price of a one year European call option with strike price
    K = 120. (2 marks)
    (b) Calculate the price of a one year European put option with strike price
    K = 120. (1 mark)
    (c) Calculate the price of an American put option with strike K = 120. (3
    marks)
    (d) Calculate the price of a European knock-in put option with strike K = 120
    and a barrier B = 130. (2 marks)
    (e) Calculate the price of a European knock-out put option with strike K = 120
    and a barrier B = 130. (2 marks)

    3. Consider a date t0 between 0 and T , and consider a chooser option, which gives
    the right at time t0 to choose to own either a T-call with strike K or a T-put
    with strike K. Show that the value of the chooser option a time 0 is the sum
    of the value of a T-call with strike K and the value of a T-put with strike
    e−r(T −t0 ) K. (5 marks)

    4. Draw the payoff diagram of each of the following options trading strategies:

    (a) A straddle. (1 mark)


    (b) A strange. (1 Mark)
    (c) A butterfly spread. (2 Marks)

    You might also like