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

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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
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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...
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## 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.

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