Options Solutions 3

Options Solutions 3 - price of $50 and that the appropriate 1-year interest rate is 6.00 What is the price of this call option using the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Old Exam Problems - Options - Solutions Page 3 of 13 Pages Calculate the price of a call option on the stock with an exercise price of $50 and a maturity of two months. (Use the binomial method.) A. $2.04 * B. $3.12 C. $4.27 D. $5.49 E. None of the above. u = 1.12; d = 0.94; P = (1.01-.94)/(1.12-.94) = .3889; (1-P) = .6111 C uu = $12.72 C ud = $ 2.64 C du = $ 2.64 C dd = $ 0.00 C u = [(.3889)($12.72) + (.6111)($2.64)] / [1.01] = $6.50 C d = [(.3889)($2.64) + (.6111)($0.00)] / [1.01] = $1.02 C 0 = [(.3889)($6.50) + (.6111)($1.02)] / [1.01] = $3.12 4. Assume that a share of stock has a current price of $50. Also assume that a call option on this stock has 1 year to maturity, a standard deviation of 0.20, an exercise
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: price of $50, and that the appropriate 1-year interest rate is 6.00%. What is the price of this call option using the Black-Scholes option-pricing model? (A cumulative normal probability table is at the end of this homework assignment -- you should round off your answers for d 1 and d 2 to two decimal places.) A. $2.04 B. $3.12 C. $4.27 * D. $5.49 E. None of the above. PV(EX) = $50 / (e .06 ) = $47.09 d 1 = {[LN($50 / $47.09)] / (.20)(1)} + [(.20)(1)/2] = .40 d 2 = = .40 - (.20)(1) = .20 N(d 1 ) = .6554 N(d 2 ) = .5793 C = (.6554)($50.00) - (.5793)($47.09) = $32.77 - $27.28 = $5.49...
View Full Document

This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

Ask a homework question - tutors are online