2. (a) Find a stock that pays a dividend and estimate the continuously compounded dividend payment rate
Question:
2. (a) Find a stock that pays a dividend and estimate the continuously compounded dividend payment rate (for example, .02). Using the Black/Scholes option pricing model (including dividends), estimate the price of an at the money call option and put option that have the same exercise price and maturity date. Assume r=.04 and use the appropriate S0, t, K. For volatility, use 40%.
(b) Evaluate how well the Black/Scholes model worked by comparing the results to the midpoints of the bid-ask prices.
(c) Find (through trial and error using the Black/Scholes formula), the implied volatility of the (i) midpoint call price and (ii) midpoint put price.
(d) Are the results of (c) the same? In theory should they be the same? Explain.
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones