Question
In: Finance
What is the premium for a call option on a stock with the following characteristics? Current...
- What is the premium for a call option on a stock with the following characteristics?
|
Current stock price |
$70 |
|
Stock price volatility (standard deviation) |
0.0693 |
|
Continuously compounded annual risk free rate |
11.94% |
|
Strike price (or exercise price) |
$80 |
|
Time to expiration (in years) |
9 months |
What is the option premium if this option is a European put and the stock will pay a dividend of $3 in six months?
Solutions
Expert Solution
Solution:
We will use Black-Scholes formula for calculation of call option and put option premium
It is given that the stock will pay a dividend of $3 in 6 months. Hence present value of the dividend will be 3 * exp ( - Interest rate * time ) = $3 * exp (-11.84% * 6/12 ) = 2.8261
Modified value of stock = Stock price - present value of dividend = 70 - 2.8261 = 67.17386
I have calculated the call and put premium using excel and
call option premium = 0.15
put option premium = 6.12
jeff jeffy answered 5 months agoRelated Solutions
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