Question: 12. Consider a forward start option which, 3 years from today, will give its owner a 2-year European call option with a strike price equal

12. Consider a forward start option which, 3 years from today,

12. Consider a forward start option which, 3 years from today, will give its owner a 2-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 20%. (iii) The forward price for delivery of 1 share of the stock 3 year from today is 60. (iv) The continuously compounded risk-free interest rate is 5%. Under the Black-Scholes framework, determine the price today of the forward start option. (A) 8.33 (B) 9.33 (C) 10.33 (D) 11.33 (E) 12.33 12. Consider a forward start option which, 3 years from today, will give its owner a 2-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 20%. (iii) The forward price for delivery of 1 share of the stock 3 year from today is 60. (iv) The continuously compounded risk-free interest rate is 5%. Under the Black-Scholes framework, determine the price today of the forward start option. (A) 8.33 (B) 9.33 (C) 10.33 (D) 11.33 (E) 12.33

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