A call option is the right to buy stock at $50 a share. Currently the option has
Question:
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatility of the stock (standard deviation) is 0.30, and the rate of interest is 10 percent (0.1 in Exhibit 20.2).
a) What is the value of the option according to the Black-Scholes model if the price of the stock is $45, $50, or $55?
b) What is the value of the option when the price of the stock is $50 and the option expires in six months, three months, or one month?
c) What is the value of the option when the price of the stock is $50 and the interest rate is 5 percent, 10 percent, or 15 percent?
d) What is the value of the option when the price of the stock is $50 and the volatility of the stock is 0.40, 0.30, or 0.10?
e) What generalizations can be derived from the solutions to these problems?
Step by Step Answer:
The variables that affect an options value according to the Black Scholes option valuation model The...View the full answer
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.
Students also viewed these Accounting questions
-
A six-month call is the right to buy stock at $20. Currently, the stock is selling for $22, and the call is selling for $5. You buy 100 shares ($2,200) and sell one call (in other words, you receive...
-
What information (explicit and implicit) can be derived from financial statement analysis? Does the standardization required by GAAP add greater validity to comparisons of financial data between...
-
An option is the right to buy or sell an asset (stocks, bonds, foreign exchange, land, etc.) for a specified price on or before a specific date. A call option is the right to buy the stock, while a...
-
Suppose that a surgical ward has gathered the following information for four nursing activities and two types of patients for the current period: Required: 1. Determine the total nursing costs...
-
Refer to the Focus on Fraud feature "Triton Energy and Noncompliance with Laws and Regulations." How did Triton Energy violate the provisions of the Foreign Corrupt Practices Act? What are the...
-
Describe why direct materials rate variance and direct materials efficiency variance may be computed with reference to different points in time.
-
A simply supported beam carries initially a uniformly distributed load of intensity \(f_{0}\). Find the vibration response of the beam if the load is suddenly removed.
-
Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the...
-
Sunshine lawn service's cost formula for salaries and wages is $ 1 , 1 0 0 per month plus $ 3 2 per lawn mowed. For the month of August, the company planned for activity of 1 0 0 lawns to be mowed,...
-
In your physics lab you release a small glider from rest at various points on a long, frictionless air track that is inclined at an angle θ above the horizontal. With an electronic...
-
A stock sells for $30. What is the value of a one-year call option to buy the stock at $25, if debt currently yields 10 percent? (Assume F(d1) and F(d2) = 1.)
-
In the body of this chapter, disequilibrium of the following equation indicated an opportunity for a riskless arbitrage: The equation was illustrated as follows. A stock sells for $105; the strike...
-
The members of the project team of which you are the leader have enthusiastically embraced blogging as a communication medium. Unfortunately, as emotions heat up during the project, some of the blog...
-
A motor is spinning with angular w = 5000 rpm as shown in Figure 1. a) Using manual calculation, determine the precession velocity of the mechanism when a mass, m=0.15 kg is attached at point C with...
-
Consider the following variables: int x = 3, y=10: Which of the following statements are true? For the line, if (x == y || y>=10), the expression y> 10 will be skipped due to short circuit evaluation...
-
Martians wants a program to help them analyze the soil on Mars. They want to determine the best areas to grow crops. You will write a program that will accept, at the command line, two Strings, one...
-
You are the newly appointed manager of a multinational technology company that operates in Canada. The company, known for its innovative products, is facing a crisis involving a global supply chain...
-
Dan's annual gifts are listed below. Calculate his taxable gifts for each year and the gift tax he owes for each year or the amount of his annual exclusion used each year. Taxable Gifts for the year...
-
Use your answer to the previous question to help you diagnose what kinds of shocks have hit the economy. If the real interest rate changes, what type of shock can you conclude must have occurred?...
-
If the annual fixed costs are 54,000 dinars, the occupation expense represents 20%, the contribution margin is 25%, and the unit selling price is 40 dinars. Required: Calculate the closing point of...
-
The two compressed architectures described in this chapter reduce instruction size by restricting the range of literals, and by reducing the size of the instruction set and the number of registers.
-
How is sensitivity analysis performed and what is its purpose?
-
Suppose that in July 2013, Nike had EPS of $2.52 and a book value of equity of $12.48 per share. a. Using the average P/E multiple in Table 10.1, estimate Nike's share price. b. What range of share...
-
Suppose that in July 2013, Nike had sales of $25,313 million, EBITDA of $3,254 million, excess cash of $3,337 million, $1,390 million of debt, and 893.6 million shares outstanding. a. Using the...
-
Damon line's stock currently sells for $ 4 3 per share. The stock's dividend is projected to increase at a constant rate of 7 . 1 3 % per year. The required rate of return on the stock, ???? ???? ,...
-
How does the concept of convergent evolution explain the development of similar traits in distantly related organisms, and what does this suggest about evolutionary pressures ?
-
Describe the mechanisms by which pathogenic bacteria can evade the host immune system and discuss the strategies used by the immune system to counteract these evasions .
Study smarter with the SolutionInn App