Question

In: Finance

1. In the B/S model, a decrease in time to expiration will lead to a. an...

1. In the B/S model, a decrease in time to expiration will lead to

a. an increase in call value and a decrease in put value

b. a decrease in call value and an increase in put value.

c. an increase in call value and an increase in put value

d. none of the above

2. The Black-Scholes option pricing model allows for continuous movements in the value of the underlying stock.

a. true

b. false

3.

Use the Black-Scholes formula to the value of a call option given the following information:

T= 6 months

standard deviation=25%

Exercise price= 50

Stock price=50

Interest rate= 2%

a. 3.75

b. 2.87

c. 3.11

d. 3.63

4. Use the information in the previous question to find the value of a six month put option on the same stock with an exercise price of 50. Round intermediate steps to four decimals and round your final answer to two decimals. Do not use the dollar sign when entering your response.

Solutions

Expert Solution

1. none of the above

Value of Call option and Put option and time to expiration has a positive relationship which means when time to expiration increases the value of call option and put option also increase and vice versa.

2. true

Black-scholes option pricing model assumes that price of underlying stock is log normally distributed which means movement in underlying stock price is continuous.

3. a. 3.75

4.

Please refer to below spreadsheet for calculation and answer (3&4). Cell reference also provided.

Cell reference -

There is minor difference i.e $0.01 in call value in our calculation, this is due to rounding off.


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