In: Finance
Current market price: $95
Strike/exercise price: $100
Risk-free rate (rf): 5%
Time (in years): .25
Standard deviation: 25%
The standard deviation is the risk associate with an option. The greater the standard deviation, the greater the risk of an option.
Use the Black-Scholes Option Pricing Model and calculate the price of this option.
S=95
K=100
t=0.25
r=5%
sigma is 0.25
d1=(ln(95/100)+(5%+0.25^2/2)*0.25)/(0.25*sqrt(0.25))=-0.2478
d2=(ln(95/100)+(5%-0.25^2/2)*0.25)/(0.25*sqrt(0.25))=-0.3728
N(d1)=0.4021
N(d2)=0.3546314
Call option price C=95*0.4021-100*e^(-5%*0.25)*0.3546314=3.1794
Put option price P=C+Xe^(-rt)-S=3.1794+100*e^(-5%*0.25)-95=6.9372