For this question use the following information:

• The volatility of Boeing Co (ticker: BA) stock is = 105% per year.
• Stock price as of 4/26: $129

Part A-

(i)Compute the today's value of the following option on the BA stock:

-European call option on BA stock issued today with exercise price X=$125 and maturity of exactly 6 months from today

*list ALL the input values: S,X,T,r,

(ii)Compute today's value of the following option on the BA stock:

-European put option on BA stock issued today with exercise price X=$115 and maturity of exactly 6 months from today

* list ALL the input values: S,X,T,r,

Part B-

Assume that you feel that BA's current stock price is incorrect. It is your belief that within the next 6 months, the BA price will either be much lower or much higher than today's price. Create the best investment strategy based on this belief. You are allowed to do only the following:

a)buy or sell one European call option on BA with maturity of 6 months, issued today with the exercise price X=$125

b)buy or sell ONE European put option on BA with maturity of 6 months, issued today with the exercise price X=$115

c)buy or sell ONE share of BA at today's price

(ii)Assume there are three possible scenarios of BA price in exactly 6 months:

1. BA price exactly 6 months from today = $83
2. BA price exactly 6 months from today = $130
3. BA price exactly 6 months from today = $200

1. How much money will you receive (+) or pay (-) from your strategy today? For each of the prices:

2. How much money will you receive (+) or pay (-) from your strategy 6 months from today (i.e. when you may or may not exercise options, liquidate the stock position IF it was a part of your strategy, etc.)?

3. Ultimate profit/loss of your trading strategy (after you consider ALL cash inflows/outflows both today and 6 months from today)

^{*Consider theses notes :}

Disregard time value of money - that is, do not discount. Disregard various transaction fees (such as commissions), and assume that you will indeed be able to buy/sell precisely one option.

Answer rating: 100% (QA)

Part A i Computation of the value of a European call option on BA stock with exercise price X 125 and maturity of 6 months Input values S stock price ... View the full answer