Question

The following data is of Put Option, you are required compute its value if the
spot rate is 58, exercise price is 60, market yield is 12%, Variance is 30% and time window
is 04 months. If this Put Option is available at a price of 10 in the market, will you Buy it?

Answer 1

Put option value using a Black-Scholes model is given by

d1 = (ln(58/60) + (0.12+ (0.3/2))*(4/12))/((0.3^0.5)*(1^0.5)) = 0.1024

d2 = 0.1024- ((0.3^0.5)*(1^0.5)) = -0.4453

N(-0.1024) = 0.4592

N(0.4453) = 0.6719

p = 60*e^(-0.12*(4/12))*0.6719 - 58*0.4592

p = 12.10

The market price of put option =10

This price is less than the calculated price of 12.10 using the Black Scholes model

Hence, the put option should be bought.