FRM Part I · FRM Exam Part I · Binomial Trees
A stock is at 100 and in one period will move to either 110 or 90. A European put option with a strike price of 105 expires at the end of the period. What is the put's delta from the one-step binomial tree?
The put's delta is -0.75. It is the change in option payoff (0 minus 15) divided by the change in stock price (110 minus 90). The negative sign shows that the put gains when the stock falls, so the hedge involves buying shares.
- A-0.75Correct
- B0.75
- C-0.25
- D-0.15
Explanation
Put payoffs are 0 when the stock is at 110 and 15 when it is at 90. Delta = (0 - 15)/(110 - 90) = -0.75. A positive 0.75 ignores the sign: a put loses value when the stock rises, so its delta is negative.
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