Question

Spot price of the stock=26.64 Strike price=26.64 Monthly stock volatility=10.681% No dividends Maturity=3 years Risk-free rate=2.28%...

Spot price of the stock=26.64

Strike price=26.64

Monthly stock volatility=10.681%

No dividends

Maturity=3 years

Risk-free rate=2.28%

Solve the European call option price using BSM model. More specifically, how do you get the annualised stock volatility?

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Answer #1

Annualized volatility= Period-wise volatility*Sq. root of t

Where t= number of period in a year.

Given,

Monthly volatility (Standard Deviation) = 10.681%

Annualized standard deviation= Monthly std. deviation*Square root of 12

Square root of 12= 12^(1/2) = 3.464101615

Therefore, annualized volatility= 10.681%*3.464101615= 37%

European Call Option price= 7.39

Calculation as below:

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