For a stock index, S = $100, = 30%, r = 5%, = 3%, and

Question:

For a stock index, S = $100, σ = 30%, r = 5%, δ = 3%, and T = 3. Let n = 3.

a. What is the price of a European call option with a strike of $95?

b. What is the price of a European put option with a strike of $95?

c. Now let S = $95, K = $100, σ = 30%, r = 3%, and δ = 5%. (You have exchanged values for the stock price and strike price and for the interest rate and dividend yield.) Value both options again. What do you notice?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

Question Posted: