You have been asked by a client to determine the maximum price he should be willing...

You have been asked by a client to determine the maximum price he should be willing to pay to purchase a Combred call. The options have an exercise price of
$45 and they expire in 156 days. The current price of Combred stock is $44 3/8, the annual
risk free rate is 7 percent and the estimated variance of the stock is 0.0961. No dividends are expected to be declared over the next six months. What is maximum price your client should pay?

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Expert Solution

Solution:

We can use Black Scholes Model to find the call premium

Spot Price = $44 3/8 = 44 + 3/8 = 44.375

Strike Price = 45

Variance = 0.0961 , Standard deviation =( 0.0961)^0.5 = 0.31

Risk free rate = 7%

Time = 156 / 365 = 0.4273972

The maximu price for the call option is 3.91 and the client should not pay more than that

jeff jeffy answered 1 year ago

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