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What is the price of a six-month European call option on a stock expected to pay...
What is the price of a six-month European call option on a stock expected to pay a dividend of $1.50 in two months when the stock price is $50, the strike price is $50, the risk-free interest rate is 5% per annum and the volatility is 30% p.a.? Show all working.
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Expert Solution
Solution:
Strike price = $50, Spot price = $50, Volatility = 30%, Risk-free rate = 5%, Time = 0.5 year
Dividend = 1.5 in 2 months
Present value of the dividend = 1.5 * exp(-5%*2/12) = 1.4876
Spot price Pv of dividend = $50 - 1.4876 = 48.5124
Using Black Scholes formula we can calculate the call option price
All the calculation are goiven in below excel image
The call option premium = 3.98
jeff jeffy answered 1 year agoRelated Solutions
What is the price of a six-month European call option on a stock expected to pay...
What is the price of a six-month European call option on a stock
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Spot price = $60
Strike Price = $44
Time to expiration = 6 months
Risk Free rate = 3%
Variance = 22% (use for volatility)
Show steps/formula
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