Question

Consider a call option on a stock, the stock price is $29, the strike price is $30, the continuously risk-free interest rate is 5% per annum, the volatility is 20% per annum and the time to maturity is 0.25.

(i) What is the price of the option? (6 points)

(ii) What is the price of the option if it is a put? (6 points)

(iii) What is the price of the call option if a dividend of $2 is expected in 60 days? (8 points)

Answer #1

(i) Price of call option (as in cell H1 of the excel image
below) = **$0.88**

(ii) Price of the put option (as in cell E14 of the excel image
below) = **$1.51**

(iii) Price of the call option if a dividend of $2 is expected
in 60 days = Price of call option - present value of dividend =
$0.88 - 2e^{-}^{0.05*60/360} =
**-$1.10**

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