a. Use the Black-Scholes formula to find the value of a call option on the following stock.
Question:
i. Time to expiration 1 year
ii. Standard deviation 40% per year
iii. Exercise price $50
iv. Stock price $50
v. Interest rate 4% (effective annual yield)
b. Now recalculate the value of this call option, but use the following parameter values. Each change should be considered independently. Confirm that the value of the option changes in agreement with the prediction of Table 23.4.
i. Time to expiration 2 years
ii. Standard deviation 50% per year
iii. Exercise price $60
v. Stock price $60
vi. Interest rate 6%
c. In which case did increasing the value of the input not increase your calculation of option value?
Step by Step Answer:
Value of the call option using Excel Spreadsheet Solution is 877 a INPUTS OUTPUTS FORMULA FOR OUTPUT IN COLUMN E Standard deviation annual 04000 PVEx ...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-1259722615
9th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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