Derivatives

Derivatives
Derivatives
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Derivatives
Questions.
(i).Calculating straddle with contract multiplier of £ 1 per index point.
The calculation is based on Black School Model. It displays price variation for a
certain time in financial instruments (Bingham & Kiesel, 2013). It is regarded as best way of
determining price options in market. In this model there are different variables that are
included. The price follows algorithm distribution criteria because all prices of asset cannot
be negative. It also assumes that there is no taxes or transaction costs and the risk free interest
is constant (Bingham & Kiesel, 2013).
Therefore, straddle value;
P=N (d2)*SK(r*T)-N*S (d1).
The overall mathematical equation;
C= ((d1) N*S)-((d2*N) (r*T) K).
S=Includes stock price.
K=Shows the strike price.
R=indicates risk free interest rate.
T=shows time to maturity.
In the question, 10 trading days (assuming that each year has 250 trading days)
with a rate of 0.5% with compound dividend of 2.5%
Total time straddle maturity =£34,244.30.
Number of years = (10trading days/250trading days)
=0.04years

Derivatives
Therefore,
T=0.04years
R=0.5%
S=£34,244.30.
K=£250
N=£36,004(compound)
Therefore,
The expected value on purchasing is given by;
= ST (d1)
=£34,244.30*0.04 (8)
=£10,958
Price after expiration in June;
= N (d2) Krt
=£36,004(0.4)2500.5*0.04
=£16,083
Therefore, contract multiplier of 1£ index point
= (price in expiration time + expected value)* 1£
= (£16,083 + £10,958)* 1£
=£27,041