Question

In: Finance

Here is a statement: “In the Black-Scholes model a derivative is delta-hedged by selling delta units...

Here is a statement: “In the Black-Scholes model a derivative is delta-hedged by selling delta units of the underlying. Since the drift coefficient (or expected return, which we denoted by the letter η) of the underlying does not play any role in the risk-neutral world, one could equivalently delta-hedge this derivative by selling the same quantity of any other asset following a geometric Brownian motion with identical volatility parameter (sigma).”

Is the statement true? Is it false?

Give a clear explanation of your answer.

Solutions

Expert Solution

The handwritten notes will provide an understanding.

The statement is true


Related Solutions

according to the black scholes merton model, if a call option has a delta of 0.8,...
according to the black scholes merton model, if a call option has a delta of 0.8, then what is the delta of the put option written on the same underlying asset with the same strike and maturity? 1. 0.8 2.. 0.2 3. -0.8 4. -0.2
Black-Scholes Model Use the Black-Scholes model to find the price for a call option with the...
Black-Scholes Model Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $28, (2) strike price is $37, (3) time to expiration is 2 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.36. Do not round intermediate calculations. Round your answer to the nearest cent.
Use the Black-Scholes model to estimate the price of a call option. Here are the input....
Use the Black-Scholes model to estimate the price of a call option. Here are the input. S = £40, E = £35, t = 6 month, Rf = 8% = 0.08, σ = std = 0.31557. b) What is the price of a put option? c) ABB call and put options with an exercise price of £17 expire in 4 months and sell for £2.07 and £2.03, respectively. If the equity is currently priced at £17.03, what is the annual...
A long position in a put option can be delta hedged by shorting delta units of...
A long position in a put option can be delta hedged by shorting delta units of the underlying. True or False.
Problem 21-12 Black–Scholes model Use the Black–Scholes formula to value the following options: a. A call...
Problem 21-12 Black–Scholes model Use the Black–Scholes formula to value the following options: a. A call option written on a stock selling for $68 per share with a $68 exercise price. The stock's standard deviation is 6% per month. The option matures in three months. The risk-free interest rate is 1.75% per month. b. A put option written on the same stock at the same time, with the same exercise price and expiration date.
The Black-Scholes Model and the Binomial Model are based on similar assumptions; however, there are some...
The Black-Scholes Model and the Binomial Model are based on similar assumptions; however, there are some important differences between the two models. Use a specific example to illustrate a difference between the two models. How does the concept of “no arbitrage” affect each model?
Critically explain the main assumption of Black-Scholes model and why the model is so popular
Critically explain the main assumption of Black-Scholes model and why the model is so popular
Please discuss the Black & Scholes model and the binomial model approach to option pricing. What...
Please discuss the Black & Scholes model and the binomial model approach to option pricing. What are the advantages and disadvantages of these two approaches? Determine the price of a call and put option assuming that the exercise price is $105, the value of the stock is $101, risk-free rate is 2.05%, standard deviation of returns on the stock is 28%, and the option has 6 months remaining to maturity. What is the price sensitivity of the call and put...
Use the Black-Scholes model to find the price for a call option with the following inputs:...
Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $36, (3) time to expiration is 6 months, (4) annualized risk-free rate is 7%, and (5) variance of stock return is 0.16. Do not round intermediate calculations. Round your answer to the nearest cent.
The Black-Scholes model shows that the value of a put option increases the longer the time...
The Black-Scholes model shows that the value of a put option increases the longer the time to expiration. Currently, the price of a stock is $100. There are two put options To sell the stock at $100. The tree-month option sells for $7 and the six month option sells for $4.50. How much do you gain or lose after three months at the following prices of the underlying stock: $85, $90, $95, $100, $105, $110?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT