The values of a stock price at the end of the second time step are $80,$100,$125.The corresponding values of an option are $0,$5,and $20 respectively.What is an estimate of gamma?
A) 0.136
B) 0.146
C) 0.156
D) 0.166

Question

Quizplus · Accepted Answer

The two delta estimates are (5−0)/(100-80)=0.25 and (20-5)/125-100)=0.6.The mid points of the ranges over which these are calculated are 90 and 112.5.The gamma estimate is therefore (0.6-0.25)/(112.5-90)= 0.156

The Values of a Stock Price at the End of the Second