Question

7. Use the Black -Scholes formula to find the value of a call option on the following stock:

Time to expiration = 6 months

Standard deviation = 50% per year

Exercise price = $50 Stock price = $50

Interest rate = 3%

Dividend = 0

8. Find the Black -Scholes value of a put option on the stock in the previous problem with the same exercise price and expiration as the call option.

NEED HELP WITH NUMBER 8

Answer 1

Value of Put option using the Black Scholes Model

P= ST * e-rt N(-d2)-SP*e-dt N(-d1)

d1 = ln (sp/st)+ r-d + (variance/2))t)/ S.D t

d2= (ln(sp/st) + (r-d-(variance/2))t) / S.d.t = d1 - S.d.t

where

p= value of put option

N is the cumulative standard normal distribution function

ST is the strike price i.e. $50

e is exponential constant (2.7182818)

r is Risk-Free Rate i.e. 3%

t is the time to expiration in years i.e. 0.5 years

s.d is standard deviation i.e. volatility i.e. 50%

By putting values in the same formula,

The value of Put option will be $6.60