In this problem you will compute January 12 2004 bid and ask volatilities (using the Black-Scholes implied
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In this problem you will compute January 12 2004 bid and ask volatilities (using the Black-Scholes implied volatility function) for 1-year IBM options expiring the following January. Note that IBM pays a dividend in March, June, September, and December. a. Compute implied volatilities ignoring the dividend. b. Take dividends into account using the discrete dividend correction to the Black-Scholes formula, presented in Chapter 12. For simplicity, discount all observed future dividends at a 2%continuously compounded rate. How much difference does this correction make in implied volatility? c. Take dividends into account by computing a dividend yield for IBM based on its annualized dividend rate as of January 12. Use this dividend yield in the Black-Scholes model. How different are the implied volatilities from those you obtain in the previous part? d. Do you observe a volatility smile? 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...
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Here is a table with all implied volatilities for parts a b and c Call Put Strike part a part b part c bidimplied askimplied bidimplied askimplied bid...View the full answer
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