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Payoff Analysis for IFeelMyself Gala

1. The document describes a payoff diagram for three call options with different strike prices: $55, $60, and $75. 2. Using the Black-Scholes formula, the values of the three call options are calculated to be $24.051, $22.401, and $18.239 respectively. 3. The total value of the package, which pays 2% of appreciation up to $60, 1% from $60 to $75, and 1% above $75, is calculated to be $8,874,234 based on the individual option values.

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Niyati Shah
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53 views8 pages

Payoff Analysis for IFeelMyself Gala

1. The document describes a payoff diagram for three call options with different strike prices: $55, $60, and $75. 2. Using the Black-Scholes formula, the values of the three call options are calculated to be $24.051, $22.401, and $18.239 respectively. 3. The total value of the package, which pays 2% of appreciation up to $60, 1% from $60 to $75, and 1% above $75, is calculated to be $8,874,234 based on the individual option values.

Uploaded by

Niyati Shah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Siddharth Gala

Project part 1
Pay off Diagram

 
 
Payoff

Profit

 
 
 
 
 
               
  1 2 3 4 5 6 E
 
Loss

 
 
13.

0<St<5
St 5 0<St<60 0<St<75 St>75
0.02(St - 0.02(St - 55)+0.01(St - 0.02(St - 55) + 0.01(St - 60) + (0.01(St
Payoff 0 55) 60) - 75)

There are three option with the following strike price : E1 = $55, E2 = $60, E3 = $75
Using Black Scholes Model

C = SN(d1) – e^rfT EN(d2)

S ( rf + 0.5 σ 2 ) T
d1 = ln E + σ √T

d2 = d1 - σ √T

(i) 2% of any price appreciation in the price of the stock up to $60 per share;

S = 55
E = 60
Risk free = 10%
Volatility = 50%
Time = 3 years

Using the formula, we get,


ln ( 5555 )+( 0.1+ 0.5∗( 0.5) )∗3
2

0.5 √ 3

N ( 0.779 )=0.782

d 2=0.779−0.5 √ 3=−0.087

N (−0.087 ) =0.465

C 1=55 ×0.789−e−0.1×3 ×55 ×0.465=$ 24.051

(ii) 3% of any price appreciation above $60 but less than $75 per share;
We understand this as call option with strike price at 60 and the non-cumulative payoff =1%

ln ( 5560 )+( 0.1+0.5∗( 0.5) )∗3


2

0.5 √ 3

N ( 0.678 )=0.751

d 2=0.678−0.5 √ 3=−0.187

N (−0.187 ) =0.425

C 1=55 ×0.751−e−0.1× 3 × 55 ×0.425=$ 22.40

(iii) 4% of any price appreciation above $75 per share;


We understand this as call option with strike price at 75 and the non-cumulative payoff =1%

ln ( 5575 )+( 0.1+ 0.5∗( 0.5) )∗3


2

0.5 √ 3

N ( 0.421 )=0.663
d 2=0.421−0.5 √ 3=−0.444

N (−0.444 )=0.328

C 1=55 ×0.663−e−0.1 ×3 ×55 ×0.328=$ 18.24

V =10,000,000 × ( 0.02× 24.051+ 0.01× 22.401+ 0.01×18.239 )=$ 8,874,234

The package is worth $8,874,234

17.
1. Using Black Scholes model

d 1=
ln ( es ) (rf +0.5 σ ) T
2

σ √T

d2 = d 1−σ √ T
Price of the European call option

100

di=
( ( )(
ln
100 )
+ 0.12+ 0.5 ( 0.6 )2 )∗0.25
= 0.25
0.6 √ 0.25
D1 = 0.25

d2= -0.05
Nd1= 0.59871

Nd2=0.48006
C=100*0.59871-100*e (-0.12*0.25) *0.48006= 13.28

value of a put on XYZ with the same E and same time to maturity as the call?

N-d1= 0.40129

N-d2=0.51994

C=100*0.40129-100*e (-0.12*0.25) * 0.51994= 10.33

American Put with Binomial


Data  
1.16183
S 100 u 4
0.86070
E 177.2119 d 8
T 0.25
rf 0.03
Sigma 0.6
n 4

t+2delta t+3delta
t t+delta t   t   t   t+4delta
182.211
9

156.831
2
134.985
9
134.985 134.985
9 9
116.183
4

100

134.985
9
116.183
116.1834 4
100 100
100
86.0708

74.0818
100 2

134.985
9
116.183
4
100 100
86.0708 100
86.0708

74.0818
2

100
86.0708
74.0818
2
74.0818
2
74.0818
2

63.7628
2

54.8811
6

(Unable to construct part 4)

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