Question
In: Finance
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?
Solutions
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
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