You are expecting XYZ stock price to go down in next 3 months, however you are not completely sure. So you decide to use just one option, either European call or European put on XYZ stock maturing in 3 months to bet on your view about XYZ's stock price prospects. Suppose that the current stock price is $125 and the strike price for both call and put on the XYZ stock is $110. 

(a) Describe your position in one option XYZ stock? Explain.

(b) Calculate Black-Scholes value of the option you have identified in part a?  The risk free rate is 5% per annum with continuous compounding. Assume that the standard deviation of XYZ's stock return is 20% per year. 

Answer rating: 100% (QA)

Solution a If you are expecting the XYZ stock price to go down in the next 3 months you should consi... View the full answer