Question

a) Given that stock price=£1.15, strike price=£1, T=0.25 (i.e. 3 months), risk free rate=0.10 and ?=0.20 calculate the price of a European call. The stock under consideration pays no dividends. Also d1=ln[S/PV(X)]/(sigmaT1/2)+(sigmaT1/2/2) and d2= d1- sigmaT1/2

b) The current price of CDE stock is £6. In each of the next two years, this stock price can either go up by £2.50 or go down by £2.00. The stock pays no dividends. The risk free rate is 3%. Using the binomial model, calculate the price of a two year put on CDE with a strike price of £7.

Answer 1

Stock Price (S)

1.15

Strike Price (X)

1

Time (T)

0.25

Risk Free rate (rf)

0.1

Volatility (Sigma)

0.2

Price of Put Option=

S*N(d1)+X*exp*(-rf*t)*N(d2)

(Black Scholes Merton Model)

d1=

ln(S/X)+ (r+0.5*sigma^2)*t / s*sqrt(T)

d2=

d1- S*Sqrt (t)

d1

1.697619

d2

1.122619

Price of the option

0.250752

B1*NORMSDIST(B12)-B2*EXP(-B4*B3)*NORMSDIST(B13)

(Formula for calculating the option price)