Assume the following information for a stock and a European call option written on the stock...

Assume the following information for a stock and a European call option written on the stock ,Exersice price 80,current stock price 70,the variance is0.4,time to expiration 0.5 semi annum ,risk free rate of return 0.07.Detaermin the time premium using Binomial ,assume it is a two period call option.

Solutions

Expert Solution

std dev = var^(1/2) = 0.4^(1/2)=63.24%

upmove u = e^(std dev*(t)^(1/2))

=e^(0.6324*(1)^(1/2))=1.882

Down move d = 1/u = 1/1.882=0.5314

Time premium = call price -max(current stock price-exercise price,0) = 23.4344-max(70-80,0) = 23.4344-0=23.4344

jeff jeffy answered 7 months ago

Next > < Previous

Related Solutions

Assume the following for a stock and a call and a put option written on the...

Assume the following for a stock and a call and a put option written on the stock. EXERCISE PRICE = $20 CURRENT STOCK PRICE = $20 VARIANCE = .25 TIME TO EXPIRATION = 3 MONTHS RISK FREE RATE = 3% Use the Black Scholes procedure to determine the value of the call option and the value of a put.

Assume we have the following information for the call option written on CCC stock. Current price...

Assume we have the following information for the call option written on CCC stock. Current price of CCC stock is $160. Continuously compounded risk-free rate is 4%. Exercise price of the call option is $165, time to maturity is six months and the volatility of the BBB stock is 25%. Assume also that the continuously compounded dividend yield is 2.1%. i. Find the (theoretical) value of the call option using BSM valuation model. ii. Note that the only difference between...

The National Stock Index is currently 573.70. A European call option, written on the index, with...

The National Stock Index is currently 573.70. A European call option, written on the index, with strike 545.00, matures in 10 months. The index pays dividends at a rate of 1.00%, and has volatility 25.00%. The (continuously compounded) interest rate is 9.30%. What is the option's gamma?

You are given the following information on two European call options written on stock XYZ at...

You are given the following information on two European call options written on stock XYZ at a strike of 175. Maturity 11/16/2018 price Maturity 01/17/2020 price XYZ price 4/11/2018 12.50 20.10 178.10 4/12/2018 9.75 17.50 172.55 Assume an annual rate of interest of 2% and an annual dividend rate of 1%. Both rates are continuously compounded. a)Compute the implied volatilities of both options on both dates. (You will compute four implied volatilities in total). b)Create a P&L explanation for these...

Assume the same investor decided to purchase a European call option on stock ABC. Further assume...

Assume the same investor decided to purchase a European call option on stock ABC. Further assume that the current price of the stock is $130. The investor paid $10 for the call with the strike price at $155. (A)If the stock price goes up to $160, what is the payoff to the investor? (B) Further assumes that the investor also decided to sell a European put option on the same underlying with the same strike price of $155 and option...

A European call option written on one share of Crook & Crook, Inc. has the following...

A European call option written on one share of Crook & Crook, Inc. has the following parameter values: S = $31, X = $37, r = 8% p.a., = 29% p.a., T = 4 months. Find the value of d2, rounded to 4 decimals (e.g., 0.0712). NOTE: Use the continuous time version of the equation

In your portfolio you have purchased 1 European Call option and written 1 European Put option...

In your portfolio you have purchased 1 European Call option and written 1 European Put option on stock ABC for $4 and $2 respectively. The strike/exercise prices of both the options are equal to $50. These options are set to expire on the 3rd Friday of June 2015. The possible values for the price of the stock ABC on the 3rd Friday of June 2015 are: $30 with 20% chance; $50 with 30% chance and $70 with 50% chance. The...

A European call option was written on the non-dividend paying shares of firm X. The option...

A European call option was written on the non-dividend paying shares of firm X. The option has an exercise price of $51 and expires in 142 days. The underlying shares of firm X currently sell for $49.28 and the standard deviation of their continuously compounded returns is 22%. The annual riskless rate is 1.75%. A. Using the Black Scholes model, what is the value of the call option. Assume a 365 day year. B. Using the put call parity relationship,...

A European call option on Visa stock costs $85.36, while a European put option on the...

A European call option on Visa stock costs $85.36, while a European put option on the same stock costs $31. Both options expire in 0.5 years and have a strike price of 800. Google does not pay dividends and its stock price is $850. What should be the risk-ree rate (effective annual rate)?

Use the Black–Scholes formula to value the following option: A call option written on a stock...

Use the Black–Scholes formula to value the following option: A call option written on a stock selling for $60 per share with a $60 exercise price. The stock's standard deviation is 6% per month. The option matures in three months. The risk-free interest rate is 1% per month. What is the value of a put option written on the same stock at the same time, with the same exercise price and expiration date.

Subjects