In: Finance
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of
$ 95.00
and expires in
89
days. The current price of Up stock is
$ 118.73
and the stock has a standard deviation of 45%
per year. The risk-free interest rate is 6.94%
per year. Up stock pays no dividends. Use a 365-day year.
a. Using the Black-Scholes formula, compute the price of the call.
b. Use put-call parity to compute the price of the put with the same strike and expiration date.
(Note: Make sure to round all intermediate calculations to at least five decimal places.)
a. Price of call option can be calculated by using Black-Scholes formula in following manner –
INPUTS | Outputs | Value | |
Standard deviation (Annual) (σ) | 45.00% | d1 | 1.19071 |
Time until Expiration (in Years) (t) | 0.2438 | d2 | 0.96850 |
Risk free rates (Annual) (r) | 6.94% | N(d1) | 0.88312 |
Stock Price (S0) | $118.7300 | N(d2) | 0.83360 |
Strike price (X) | $95.00 | B/S call value (C ) | 26.98895 |
Dividend yield | 0.00% | B/S Put Value (P) | 1.66486 |
Price of call option is $26.98895
Formulas used in excel calculation:
b. Now price of put option by using following put-call parity equation
P = C –S0 + X* e^ (-r*t)
Where,
C = price of the call option = $26.98895
P= price of the put option =?
S0 = spot price = $118.73
Strike price X= $95
The risk-free rate r= 6.94%
Time period t= 89/365 = 0.2438
Now putting all the values in the put-call parity equation
P = $26.98895 - $118.73 + $95 * e^ (-0.0694*0.2438)
Or P = $26.98895 - $118.73 + $93.40615 = $1.66486 (which is equal to the value of Put option using Black-Scholes formula)