General Synergistics is an emerging leader in the development of bioengineering technology. Since its stock is relatively
Question:
1. What is an option?
2. Suppose General Synergistics, which is currently trading at $28, has 9-month put and call options with a striking price of $25. The call option currently sells for $7.50 per share while
the put option costs $2.00 per share.
(1) What is the minimum number of shares in a stock option contract?
(2) Is the call option in or out of the money? What about the put option?
3. Again consider General Synergistics' call option with a $25 striking price. The following
the table contains historical values for this option at different stock prices:
Stock Price Call Option Price
$25 $ 3.00
30 7.50
35 12.00
40 16.50
45 21.00
50 25.50
(1) Create a table that shows (a) stock price, (b) striking price, (c) expiration value, (d)
option price, and (e) the premium of option price over expiration value.
4. In 1973, Fischer Black and Myron Scholes developed the Black-Scholes Option Pricing
Model (OPM).
(1) What assumptions underlie the OPM?
(2) What is the value of the following call option according to the OPM?
Stock price = $28.00
Exercise price = $25.00
Time to expiration = 9 months
Risk-free rate = 5.0%
Stock return variance = 0.30
5. What impact does each of the following call option parameters have on the value of the
option?
(1) Current stock price
(2) Exercise price
(3) Option period
(4) Risk-free rate
(5) Stock return variance