Question: Consider a forward start option which, 1 year from today, will give its owner a 1-year European call option with a strike price equal to

Consider a forward start option which, 1 year from today, will give its owner a 1-year European call option with a strike price equal to the stock price at that time.

You are given:

(i) The European call option is on a stock that pays no dividends.

(ii) The stock’s volatility is 30%.

(iii) The forward price for delivery of 1 share of the stock 1 year from today is 100.

(iv) The continuously compounded risk-free interest rate is 8%.

Under the Black-Scholes framework, determine the price today of the forward start option.

(A) 11.90

(B) 13.10

(D) 15.70

(E) 16.80

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