Options Solutions 5

Options Solutions 5 - * E. 2.33% Using put-call parity C =...

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Old Exam Problems - Options - Solutions Page 5 of 13 Pages (\$50)(0.98)(1.10) = \$53.90 (\$50)(0.98)(0.98) = \$48.02 C uu = \$60.50 - \$40.00 = \$20.50 C ud = \$53.90 - \$40.00 = \$13.90 C du = \$53.90 - \$40.00 = \$13.90 C dd = \$48.02 - \$40.00 = \$ 8.02 C u = [(.25)(\$20.50) + (.75)(\$13.90)]/[1.01] = \$15.40 C d = [(.25)(\$13.90) + (.75)(\$8.02)]/[1.01] = \$9.40 C 0 = [(.25)(\$15.40) + (.75)(\$9.40)]/[1.01] = \$10.79 7. Assume that a stock is currently selling at a price of \$75.00 in the open market. A put, with an exercise price of \$77.00, sells for \$2.00. Determine what risk-free rate would be implied by put-call parity if the equivalent call for the same stock sells for \$1.75. A. 4.26% B. 6.66% C. 5.48% D. 3.07%
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Unformatted text preview: * E. 2.33% Using put-call parity C = P + S - E / (1+r) t \$1.75 = \$2.00 + 75.00 - \$77.00 / (1+r) -\$75.25 = -77.00 / (1+r) (1+r) = -\$77.00 / -\$75.25 = 1.0232558 r = 2.33% 7. Assume that a share of stock has a current price of \$60. Also assume that a call option on this stock has 1 year to maturity, a standard deviation of 0.20, an exercise price of \$50, and that the appropriate 1-year interest rate is 4.00%. 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 exam -- you should round off your answers for d 1 and d 2 to two decimal places.) A. \$12.04 B. \$13.75 C. \$14.19...
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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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