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pttang
December 3rd 2008, 08:51 PM
Hello,

I am wondering if anyone can answer the following question from ASM...

A European option is modeled with a 1-period binomial tree. You are given:
1. The stock price is 20.
2. The strike price is 20.
3. The risk-free rate is 3%.
4. The continuous dividend rate is 1%.
5. Delta for a 6-month call option is 0.4
Determine Delta for a 6-month European put option with a strike price of 20.

Ans: Using put-call parity, P = C - S* exp(-0.01 * 0.5) + K* exp(-0.015). The answer is 0.4 - exp(-0.005).

I am very lost in where 0.4 - exp(-0.005) comes from.

Thanks for your help in advance!

yorklee44
December 4th 2008, 01:50 AM
Like the answers says, a Put is a Call minus exp(-0.005) shares of stock. The call has delta 0.4, so your answer is 0.4 - exp(-0.005). This is the shortcut answer that they gave. If you wanna go through the whole calculation, find u, d, Cu and Cd to find delta for the Put and see if you get the same answer.

pttang
December 4th 2008, 08:33 PM
Thanks so much for your reply. I failed to notice the explanation right after the shortcut. My bad.