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
C
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
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