Find the risk-neutral probabilities

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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.

Reference no: EM131058083

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