Question

Suppose that you just joined the Kuala Lumpur office of the Standard Chartered Bank. On your first day on the job, you have been asked to value a European option on a stock. The stock is currently trading at 60.00 ringgits per share. The 4-month nominal risk-free ringgit interest rate is 6.5%. Your colleague, who was previously working in the stock, has estimated the weekly return volatility (i.e., the volatility based on weekly return) to be 3.1%.

(a)       Find the value of a 4-month European call option on the stock with strike or exercise price equal to 55 ringgits.

(b)       Find the value of a 8-month European call option on the stock with strike or exercise price equal to 55 ringgits.

Answer 1

Vs or Current price of the stock =60.00

E or exercise price = 55.00

Time (t)= 4/12 months

or Standard deviation for 7 days =3.1%

for 1 day = = 1.1718 %

for 1 year or 365 days = for 1 day * = 22.38%

r or Risk free rate of interest per Year = (6.5%/ 4 months) *12 Months = 19.5%

=>

=>

=> (Note - Ln(1.091) = log e 1.091 = 0.0871)

=>

= 8.88

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(B)

=>

=> =

=>

Value of Put option = = $ 0.56

N(d1) = Normal distribution

e= 2.71828