Find the risk-neutral probabilities
Financial Management
Q1. A bullish call spread is bullish on direction. Is it also bullish on
volatility? Let’s assume the payoff diagram with exercise price is $95 and $100 for
a call bull spread. Explain your answer.
Q2. Assume KBC stock is currently at S = $100. After one period, the price will
move to one of the following two values: [uS and dS], where [u = 1.2; d = 0.9]. A
$1.00 investment in the risk-free asset using continuous compounding will return
$1.10 at the end of the period.
(a) Find the risk-neutral probabilities governing the movement of the stock price.
(b) For a strike price of 100 for call, find the delta of the call.
(c) For a strike of 100 for put, find the delta of the put.
(d) Compute the difference between the call delta and the put delta and explain the
answer you get
