Lucille has just purchased a call option on YYY Corp.Shares of YYY are trading at $20 each, and the exercise price on the call is $19.The option expires in 75 days and during this period, Lucille can invest at the risk-free rate of 3.5%, continuously compounded.Upon careful review of the company's history, Lucille has determined that the variance of returns on YYY shares is 0.14.

Your assistant has prepared some preliminary calculations and has determined that N(d₁)=.6663and N(d₂)=.6026

Required:

a)Using the Black-Scholes option pricing model, determine the value of the call option that would be appropriate given the characteristics described above.

b)Explain and calculate the time value of the call option.

c)If the time to expiry were 150 days instead of 75 days, describe the impact this would have on the time value of the call option (do not recalculate).

d)Calculate the appropriate price for a put option on YYY Corp. shares if it also expires in 75 days and has an exercise price of $19.

e)When would Lucille be interested in purchasing a put option rather than a call option?

Answer rating: 100% (QA)

Analyzing Lucilles Option on YYY Shares a Value of the Call Option We can directly use the BlackScholes formula to calculate the call option value C S ... View the full answer