Calculate the Black-Scholes call option value for each case and verify the impact the 5 factors have
Question:
Calculate the Black-Scholes call option value for each case and verify the impact the 5 factors have on a call price. Summarize in words what you observe.
a. A call option with a $15 exercise price expires in 6 months. The 6-month interest rate is 3%. What is the call price if the stock price is $14? If the stock price is $16? The standard deviation of the stock's annual return is expected to be 40%.
b. A call option with a $10 exercise price expires in 9 months. The 9-month interest rate is 4.5% and the stock price is $13. The standard deviation of the stock's annual return is expected to be 70%. What is the call price? If the exercise price is $13, what is the call price?
c. A call option with a $25 exercise price expires in 9 months. The 9-month interest rate is 4 .5% and the stock price is $18. The standard deviation of the stock's annual return is expected to be 55%. What is the call price? If the interest rate is 5%, what is the call price?
d. A call option with a $20 exercise price expires in 6 months. The effective annual interest rate is 4% and the stock price is $23. The standard deviation of the stock's annual return is expected to be 40%. What is the call price? If the standard deviation of the stock's annual return is expected to be 70%, what is the call price?
e. A call option with a $30 exercise price expires in 3 months. The effective annual interest rate is 4% and the stock price is $23. The standard deviation of the stock's annual return is expected to be 50%. What is the call price? If the time to expiry is 6 months, what is the call price?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781259087585
6th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan, Gordon Roberts