Consider a stock of XYZ Firm . It has an expected return of 10% per year, and it has a estimated return volatility of 20% per year. The risk-free rate is 6% per year (CCR). XYZ stock has a current price of $100 and has declared dividends of $13 to be paid at the end of each year.

 1. Find the value of a European call option expiring in 2 years with a strike price of $110 using the Black-Scholes-Merton model. 

2. Construct a tracking portfolio (at the current time t = 0) using ABC stock and the risk-free asset to replicate the above call option based on the BSM model. 

3. Find the value of a European put option expiring in 2 years with a strike price of $110 using the BSM model. 

4. Find the value of an American call option expiring in 2 years with a strike price of $110 using the (pseudo) BSM model. 

5. Suppose the European call price in the market is actually $3.00. What is the return volatility implied by this price and the BSM

Answer rating: 100% (QA)

1 Call option value S0Nd1 KertNd2 S0 current stock price 100 K strike price 110 r riskfree rate 6 t time to expiration 2 years sigma volatility 20 d1 ... View the full answer