Consider a one-year european call option on a stock

Reference no: EM133331736

Question: Consider a one-year European call option on a stock. The stock price is $30, the strike price is $30, the risk-free rate is 5% per annum, and the stock price volatility is 25% per annum.

a) Calculate the price, delta, gamma, vega, theta, and rho of the option.

b) Explain in words what delta, gamma, vega, theta, and rho mean.

c) Verify that delta is correct by changing the stock price to $30.1 and re-computing the option price. (Hint: Delta predicts the change in option price as stock price changes.)

d) Verify that gamma is correct by re-computing the delta for the situation where the stock price is $30.1. (Hint: Gamma predicts the change in delta as stock price changes.)

e) What happens to your answer in c) if the stock price changes to $35? (Hint: Delta makes good prediction in option price movement if the stock price movement is small.)

Reference no: EM133331736

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