Consider a 1-year call option with strike price 100 on a non-dividend paying stock with the...
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Consider a 1-year call option with strike price 100 on a non-dividend paying stock with the following parameters: Underlying stock price Volatility Riskless rate $100 30% pa 1% (cc) pa Assume that the standard Black-Scholes assumptions apply, i.e. the underlying stock price follows a Geometric Brownian Motion and the interest rate is constant. Assume the year has 252 business days. 3. Option with sweetener. Assume that the call has a "sweetener": If the stock return after six months is negative (i.e., the stock price six months from now is lower than today) the final strike price of the option is 90 instead of 100. Compute the value of the call with the sweetener using Monte Carlo simulation with N = 10, 000 draws. Is it different from the price of a standard call (why)? Compute a 99% confidence interval for the option price. Consider a 1-year call option with strike price 100 on a non-dividend paying stock with the following parameters: Underlying stock price Volatility Riskless rate $100 30% pa 1% (cc) pa Assume that the standard Black-Scholes assumptions apply, i.e. the underlying stock price follows a Geometric Brownian Motion and the interest rate is constant. Assume the year has 252 business days. 3. Option with sweetener. Assume that the call has a "sweetener": If the stock return after six months is negative (i.e., the stock price six months from now is lower than today) the final strike price of the option is 90 instead of 100. Compute the value of the call with the sweetener using Monte Carlo simulation with N = 10, 000 draws. Is it different from the price of a standard call (why)? Compute a 99% confidence interval for the option price.
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Assuming that the standard BlackScholes assumptions apply the stock price six months from now would be lower than today if the stock return after six months is negative In this case the final strike p... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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