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...
-
How soon would the loan in Problem 21 pay off if the borrower made a single additional payment of $17,936.29 to reduce principal at the end of the fifth year?
-
Frequently, sales managers use contests and recognition rewards to motivate the sales force. If sales managers understand salesperson performance, why is it necessary to employ these additional...
-
What kinds of portable IT help employees work more efficiently and effectively? What may interfere with productivity?
-
The grain stored inside a cylindrical silo is transferred to a transport container in the shape of a triangular prism. The container's triangular base has side lengths 5.8m, 5.8m, and 8.1m and height...
-
Through market research and competitor analysis Nebraska Toaster Company has found a market for toaster oven new product that is not currently being produced by competitors. This new toaster can...
-
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...
-
1. Describe the jobs of different types of salespeople and list the characteristics of successful salespeople; identify a characteristic that you personally need to develop to be a successful...
-
Are only unconditional promises or orders negotiable? If yes, why? If no, why not?
-
Rich Foods Company advertises that its cereal, Fiber Rich, reduces cholesterol. After an investigation and a hearing, the FTC finds no evidence to support the claim. To correct the publics impression...
-
How can global open innovation help companies be cost efficient whilst remaining innovative?
-
What is the key to liability on a negotiable instrument?
-
What is the effect of a blank indorsement?
-
Match the following memory disorders with the correct information: i. Affects alcoholics; may result in hallucinations ii. Memory loss occurring without other mental problems iii. Beta amyloid...
-
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...
-
Explain why leasing is an option for a company expansion. include, what leasing is and how it will benefit the company in it's expanding efforts. Also, how is capital or operating leasing recorded on...
-
Discuss the following statement: " A head of state signs a treaty on behalf of his country in excess of authority of his country, such treaty shal be void for inconsistency with domestic law of the...
-
A company is looking at new equipment with an installed cost of $415,329. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the equipment can be...
Study smarter with the SolutionInn App