Question

Use the following information to answer the next two questions. A stock currently trades for $110...

Use the following information to answer the next two questions.

A stock currently trades for $110 per share. Call options on the stock are available with a strike price of $115. The options expire in 20 days. The annual risk free rate is 4% and the expected standard deviation is 0.40.

Find the value of a call option using the Black-Scholes option pricing model (Assume 365 days per year)

Use the Black-Scholes option pricing model to find the value of a put option written on the same stock that matures in 20 days and has a strike price of 115. (Assume 365 days per year).

Homework Answers

Answer #1

HI

Here S=110,

X=115,

r=4%=0.04,

=0.4,

time to maturity t =20/365=0.0548 years

Call Value C= SN(d1) – Xe-rtN(d2)

q = 0

d1 = (ln(110/115) + 0.0548*(0.04+(0.4)^2/2))/0.4*sqrt(0.0548)

d1=-0.4045

d2 = d1 - std dev*sqrt(t) =

d2=-0.4981

N(d1)=0.3429

N(d2)=0.3092

Value of Call C = 110*0.3429 - 115*e^(-0.04*20/365)*0.3092

Value of Call C = $2.24

Value of Put P = Xe –r(t) [1-N(d2)] – S [1-N(d1)]

P = 114.748*(1-0.3092) -110*(1-0.3429)

P = $6.99

Thanks

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