The current stock price is $100, the exercise price is $105.1271, the risk-free interest rate is...

The current stock price is $100, the exercise price is $105.1271, the risk-free interest rate is 5

percent (continuously compounded), the volatility is 30 percent, and the time to expiration is

one year (365 days).

a. Using the BSM model, compute the call and put prices for a stock option.

b. In the previous question (3a) you should get the same price for the call and the put, or very

similar (the differences are due to the rounding of the decimal points). Knowing this, explain

why this happens. (HINT: Look at the put-call parity formula).

Solutions

Expert Solution

ANSWER IN THE IMAGE. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

price = 11.92

B. As per put call parity

P+ S = present value of X + C

P= value of put option.
S= current price of share
X= strike price
C= value of call option.
Present value of X.
r = risk free rate.

The price of put and call are same because.

S = present value of X.

Present value of X = 105.1271/e^0.05
= 105.1271/1.051271
= 100.

And S= 100 (Given).

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

ABC Company's current stock price is $100. The risk free rate is 4% a) The maximum...

ABC Company's current stock price is $100. The risk free rate is 4% a) The maximum value of a European put option with an exercise price of $50 and 6 months remaining till expiration is closest to? b)The minimum value of an American call option with an exercise price of $80 and 6 months till expiration is closest to?

The current price of a non-dividend-paying stock is $50. The risk-free interest rate is 1%. Over...

The current price of a non-dividend-paying stock is $50. The risk-free interest rate is 1%. Over the next year, it is expected to rise to $52 or fall to $47. An investor buys a European put option with a strike price of $53. What is the value of the option? Group of answer choices: A: $0.93 B: $1.93 C: $1.95 D: $2.47

The current price of a stock is $ 55.52 and the annual effective risk-free rate is...

The current price of a stock is $ 55.52 and the annual effective risk-free rate is 3.4 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $ 12.80 . What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Show your answer to the nearest .01. Do not use $ or , in your answer....

A stock price is $74, and current risk free interest rates are 2%. If the put...

A stock price is $74, and current risk free interest rates are 2%. If the put option with a $100 strike price expires in 6 months, and the call option is trading at $26.25, how would you arb this option?

The current stock price of KMW is $27, the risk-free rate of return is 4%, and...

The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25?

suppose that the stock price $32, the risk-free interest rate is 10% per year the price...

suppose that the stock price $32, the risk-free interest rate is 10% per year the price of a 4 month european call option is $2.85, and the price of a 4 month european put option is $2.65. both options have the strike price $35. describe an arbitrage strategy and justify it with appropriate calculations.

risk free interest rate = 0.08 price of stock at expiration = St St is unknown...

risk free interest rate = 0.08 price of stock at expiration = St St is unknown quantity, st > 0 one contract = 100 share 1. we implement bull put at strike price 47.5 and 42.5 on a stock, receving a net payment or 1.45 on this transaction a. is this buy or selling, call or puts, and which strike price in each case? b. what is the max value profit for one contract? ( T=1/4 (3 months) ) explain...

a) (10 pts) Suppose that the stock price is $31, the risk-free interest rate is 9%...

a) (10 pts) Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the price of a three-month European call option is $2.69, and the price of a 3-month European put option is $2.25. Both options have the strike price $29. Assume monthly compounding. Describe an arbitrage strategy and justify it with appropriate calculations. Please write your solution in complete sentences. b) (10 pts) Use the same data as in part (a), but suppose now...

Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the...

Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the price of a three-month European call option is $2.70, and the price of a 3-month European put option is $2.24. Both options have the strike price $29. Assume monthly compounding. Describe an arbitrage strategy and justify it with appropriate calculations. Please write your solution in complete sentences.

The current price of a stock is $ 54.61 and the annual effective risk-free rate is 7.0 percent.

The current price of a stock is $ 54.61 and the annual effective risk-free rate is 7.0 percent. A call option with an exercise price of $55 and one year until expiration has a current value of $ 11.37 . What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Show your answer to the nearest .01. Do not use $ or , in your answer....

Subjects