Derive gamma of a european call option on a dividend-paying

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1. Solving the Black-Scholes equation, we calculate the European call option price on a non-dividend-paying stock as

c=SN(d1)-Ke-
r
TN(d2)

where the K is the strike price and T is the time for the option to mature, and

d1=(ln(S/K)+((r+σ
2
)/2)×T)/(σ√T)

d2=d1-σ√T

Problem 1) Derive gamma of a European call option on a dividend-paying stock. Please show your calculations and reasoning

Problem 2) Please discuss / explain the sign of gamma and its significance.

Problem 3) Is it possible to set up a position in the stock and the option that remains riskless for the whole of the life of the option? Please explain your reasoning

Reference no: EM132970695

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