Week 2 Sol

# Week 2 Sol - 8-1 Exercise value = Current stock price...

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8-1 Exercise value = Current stock price – strike price = \$30 - \$25 = \$5. Time value = Option price – Exercise value = \$7 - \$5 = \$2. 8-3 P = \$15; X = \$15; t = 0.5; r RF = 0.06; σ 2 = 0.12; d 1 = 0.24495; d 2 = 0.0000; N(d 1 ) = 0.59675; N(d 2 ) = 0.500000; V = ? Using the Black-Scholes Option Pricing Model, you calculate the option’s value as: V = P[N(d 1 )] - [N(d 2 )] = \$15(0.59675) - \$15e (-0.06)(0.5) (0.50000) = \$8.95128 - \$15(0.9512)(0.50000) = \$1.6729 \$1.67. 8-4 Put = V – P + X exp(-r RF t) = \$6.56 - \$33 + \$32 e -0.06(1) = \$6.56 - \$33 + \$30.136 = \$3.696 \$3.70. 8-6 The stock’s range of payoffs in one year is \$26 - \$16 = \$10. At expiration, the option will be worth \$26 - \$21 = \$5 if the stock price is \$26, and zero if the stock price \$16. The range of payoffs for the stock option is \$5 – 0 = \$5. Equalize the range to find the number of shares of stock: Option range / Stock range = \$5/\$10 = 0.5. With 0.5 shares, the stock’s payoff will be either \$13 or \$8.

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## This note was uploaded on 03/07/2012 for the course BUSN 1000 taught by Professor Web during the Spring '12 term at Webster.

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Week 2 Sol - 8-1 Exercise value = Current stock price...

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