8. Consider the following price data for TanCo stock in two different subperiods: Subperiod A: 168.375; 162.875;

Question:

8. Consider the following price data for TanCo stock in two different subperiods:
Subperiod A: 168.375; 162.875; 162.5; 161.625; 160.75; 157.75; 157.25; 157.75; 161.125; 162.5; 157.5; 156.625; 157.875; 155.375; 150.5; 155.75; 154.25; 155.875; 156; 152.75; 150.5; 150.75
Subperiod B: 122.5; 124.5; 121.875; 120.625; 119.5; 118.125; 117.75; 119.25; 122.25; 121.625; 120; 117.75; 118.375; 115.625; 117.75; 117.5; 118.5; 117.625; 114.625; 110.75
a. For each subperiod, calculate the annualized historical measure of stock volatility that could be used in pricing an option for TanCo. In your calculations, you may assume that there are 250 trading days in a year.
b. Suppose now that you decide to gather additional data for each subperiod. Specifically, you obtain information for a call option with a current price of $12.25 and the following characteristics: X = 115; S = 120.625; time to expiration = 62 days; RFR = 7.42 percent; and yield = 3.65 percent. Here the risk-free rate and yields are stated on an annual basis. Use the volatility measure from Subperiod B and the Black-Scholes model to obtain the "fair value" for this call option. Based on your calculations, is the option currently priced as it should be? Explain.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...