In: Finance
XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $64 per share. A call option on XYZ has an exercise price of $58 and 3-month time to expiration. The risk-free interest rate is 0.7% per month, and the stock’s volatility (standard deviation) = 8% per month. Find the Black-Scholes value of the American call option. (Hint: Try defining one “period” as a month, rather than as a year, and think about the net-of-dividend value of each share.) (Round your answer to 2 decimal places.) Ps: The answers to this question already on chegg are incorrect.
Expected dividend in two months = $2 per share
Current stock price = $64 per share
Risk free rate r = 0.7% per month
Present value of expected dividend = $2/ (1 +0.7%) ^ (2) = $1.9723
Net-of-dividend Or Dividend-adjusted stock price S = $64 – $1.9723 = $62.0277
Now call option price calculation:
INPUTS | Outputs | Value | |
Standard deviation (monthly) σ | 8.00% | d1 | 0.7054 |
Expiration (in months) T | 3.00 | d2 | 0.5668 |
Risk free rates (monthly) r | 0.70% | N(d1) | 0.7597 |
Current stock price (S) | $62.0277 | N(d2) | 0.7146 |
Exercise price (X) | $58.00 | B/S call Price | $6.54 |
Dividend yield | 0 | B/S Put Price | $1.31 |
formulas used in excel: