# ch5sol - CHAPTER 5 OPTION PRICING THEORY AND MODELS Problem...

This preview shows pages 1–3. Sign up to view the full content.

CHAPTER 5 OPTION PRICING THEORY AND MODELS Problem 1 A. The values of the option parameters are as follows: S = \$83 K = \$85 t = 0.25 r = 3.80% Variance = 0.09 Value of call = \$4.42 B. To replicate this call, you would have to: Buy 0.4919 Shares of Stock (this is N(d1) from the model) and Borrow K e -rt N(d2) = 85 exp -(0.038)(0.25) (0.4324) = \$36.40 C. At an implied variance of 0.075, the call has a value of approximately \$4.00 (the market price). Implied Standard Deviation = 0.075 = 0.2739 D. Stock Price \$85 \$90 E. Value of Three-month Put = C - S + Ke -rt = \$4.42 - \$83 + 85 exp -(0.038)(0.25) = \$5.62 Problem 2 A. S = \$28.75 K = \$30 t = 0.25 r = 3.60% σ 2 = 0.04 PV of Expected Dividends = \$0.28/(1.036) 2/12 = \$0.28

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Dividend Discount Models 2 Value of Call = \$0.64 B. The payment of a dividend reduces the expected stock price, and hence reduces the value of calls and increases the value of puts. Problem 3 A. First value the three-month call, as above: Value of Call = \$0.64 Then, value a call to the first (and only) dividend payment, S = \$28.75 K = \$30 t = 2/12 r = 3.60% σ 2 = 0.04 y = 0 (since it assumes exercise before the dividend payment) Value of Call = \$0.51 Since the value of the three-month call is higher, there is no anticipated exercise.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern