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 3 weeks ago

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