Compute Δ for the following call option.The stock is selling for $23.50.The strike price is $25.The possible stock prices at the end of 6 months are $27.25 and $21.75.
A) 0.4091
B) 0.6822
C) 0.8433
D) 0.9216

Question

Quizplus · Accepted Answer

Delta (Δ) measures the rate of change of the option's price with respect to changes in the underlying asset's price. For a call option, Δ can be computed using the formula: Δ = (C_up - C_down) / (S_up - S_down), where C_up and C_down are the option values for the up and down states of the stock price, and S_up and S_down are the corresponding stock prices.Given:- Stock price (S) = $23.50- Strike price (K) = $25- Up state stock price (S_up) = $27.25- Down state stock price (S_down) = $21.75First, calculate the option values in the up and down states:- In the up state, the option value (C_up) = max(S_up - K, 0) = max(27.25 - 25, 0) = $2.25- In the down state, the option value (C_down) = max(S_down - K, 0) = max(21.75 - 25, 0) = $0Now, calculate Δ:Δ = (C_up - C_down) / (S_up - S_down) = (2.25 - 0) / (27.25 - 21.75) = 2.25 / 5.5 = 0.4091

Compute Δ for the Following Call Option