Past exam of the martingales and financial mathematics course of the University of Oxford / 2007 / B / 6 / d

The contingent claim payoff derivative is ${\Psi }^{\prime }(s)=2(s-K{)}_{+}$. Differentiating the risk-neutral valuation is justified by the finite lognormal distribution, and $S_T$ is proportional to the starting stock value $s$. ThusFor a lognormal terminal stock, completing the square in its Gaussian exponent givesUse $p=2$ and $p=1$, and let $d_1=[\log (s/K)+(r+{\sigma }^2/2)\tau ]/(\sigma \sqrt{\tau })$. The result isAs $\tau \downarrow 0$ this tends to $2(s-K{)}_{+}$, including value zero at $s=K$, as required. The extra ${\sigma }^2$ in the option delta PDE's stock drift gives the same shifted Gaussian arguments. This is delta of a squared positive-part call.