During today’s meeting of Finance 4366, I did not manage to get around to working problems 2 and 3 in the Risk Neutral Valuation Class Problems document. Since the best way to learn is by doing, consider problems 2 and 3 in the Risk Neutral Valuation Class Problems document as an extra credit problem set which is due at the beginning of class on Thursday, November 9. If you decide to work this problem set, it will replace the lowest problem set grade (assuming that you score higher on this extra credit).

Helpful hint for problem 3 in the Risk Neutral Valuation Class Problems document: in your response to the first part of that problem, I don’t expect anyone to derive the arbitrage-free price of a European call option (AKA the Black-Scholes-Merton option pricing formula). The solution appears in the reading entitled “Derivation and Comparative Statics of the Black-Scholes Call and Put Option Pricing Equations”; see equation (9) on page 6. It would suffice if you simply cite the solution shown there. Furthermore, theta and delta appear in Table 1 on page 18, although you would need to find gamma on your own – since delta is equal to , gamma is obtained by differentiating with respect to *S.*

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