A non-dividend paying stock currently trades for $37.61 and has an annualised return standard deviation of 17.5%.
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Question:
A non-dividend paying stock currently trades for $37.61 and has an annualised return standard deviation of 17.5%. Given that the continuously compounded risk-free rate of return is 2.737% p.a., complete the following:
- Using a two-step binomial tree, price the European put option on the stock when the put has an exercise price of $35 and 6 months to maturity.
- Use BSM to calculate the theoretical price of the put option.
- Discuss the advantages and disadvantages of buying verses selling put options.
- Explain the concept of implied volatility including how it is calculated.
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