Question: In the notes, Example 5 , page 23 has the following parameters: S= 50; X= 45; R f = 6%, 2= 20%; and T= 3
In the notes, Example 5, page 23 has the following parameters: S= 50; X= 45; Rf = 6%, 2= 20%; and T= 3 months. Find the value of the call using an excel spread sheet. It should equal $7.62.
2. Using Example 5 as the base case, find the value of the call for a range of stock prices, say from $5 to $300 in increments of $5. Plot these values in excel. Comment on how the value approaches certain limits, i.e. when the option is deep in the money, what is the limit on the value of the option. What happens to the time value of the option?
3. Using Example 5 as the base case, find the value of the call for a range of volatilities. Plot these values in excel. I would suggest going from 5% to 300%.
4. Using Example 5 as the base case, find the value of the call for a range of exercise prices say from $5 to $100 in increments of $5. Plot these values in excel.
5. Using Example 5 as the base case, find the value of the call for a range of maturities say from 1 month to 12 months. Plot these values in excel.
6. Provide some narrative on these factors. Which factor seems to provide the most impact? Why?
7. Pick a firm that has traded options.[1] Include some values as an attachment. Comment on the volume. Which option seems to be the most traded? Why?
[1] Where do you find options? Try Finra.org. From the landing page, click investors. From there, click market data. On the side panel, click "Equities and Options." make a ticker symbol for the firm, and from there you will get tabs for data, include options prices. You can also you Yahoo finance, and other sites for the data.
| S= stock Price | 85 | ||
| K=strike price | 85 | ||
| T= option maturity | 0.333 | ||
| r=risk free rate | 0.1 | ||
| v = variance of return | 0.16 | ||
| 0 = sdev of return | 0.4 | ||
| d1=((log(S/K)+r*t)/sqrt(v*T) +0.5*sqrt(v*T) | |||
| d2= d1- sqrt(v*T) | |||
| d1 = | 0.25967768 | ||
| d2 = | 0.02885308 | ||
| call price = C = S*N(d1)-K*exp(-r*T)*N(d2) = | 9.15 | ||
| put price = C-S + K*exp(-R*t) = | 6.37 | ||
| call- duplicating portfolio | |||
| $ in stock | 51.21 | ||
| $ borrowed | 42.05 | ||
| put- duplicating portfolio | |||
| $ short in stock | -33.79 | ||
| $ lent | 40.16 | ||
| Hasting's Approximation for a NCDF | |||
| p = | 0.33267 | ||
| a = | 0.4361836 | ||
| b = | -0.1201676 | ||
| c = | 0.937298 | ||
| t1 = | 0.92048232 | ||
| t2 = | 0.9904927 | ||
| NCDF(d1) = | 0.60244518 | ||
| NCDF(d2) = | 0.51151464 |
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help