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Past exam of the mathematics course of the University of Cambridge

2026

Paper 202

In the <Black-Scholes model>,
$$
S_t=S_0\exp\!\left(\sigma W_t-\frac12\sigma^2t\right).
$$
Conditioning on $\mathcal F_t$ and using the <moment-generating function> of the independent Gaussian increment $W_T-W_t$ gives
$$
C_t=\sqrt{S_t}\exp\!\left(-\frac18\sigma^2(T-t)\right)
=c(t,S_t).
$$
The function $c$ satisfies the zero-rate <Black-Scholes equation>, so <Itô formula> leaves only its stochastic term:
$$
dC_t=\partial_sc(t,S_t)\,dS_t.
$$
Consequently the required <delta hedge> is
$$
\boxed{\Delta(t,s)=\partial_sc(t,s)
=\frac1{2\sqrt s}\exp\!\left(-\frac18\sigma^2(T-t)\right).}
$$

Solution

Past exam of the mathematics course of the University of Cambridge / 2026 / iii / Paper 202 / 4 / c / Solution

Past exam of the mathematics course of the University of Cambridge / 2026 / iii / Paper 202 / 4 / c / Solution

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Past exam of the mathematics course of the University of Cambridge / 2026 / iii / Paper 202 / 4 / c / Solution

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