Question 2 [16 marks]

a) Bill has just enrolled for an Engineering degree at Wits University. He is expected to

complete the degree in the next four years. He was awarded a bursary to cover the tuition

fees. His father gave him R100 000 to cover living expenses for the duration of the

degree. He has just invested the money in a financial asset today. The financial asset

pays 12% interest per annum. Bill is a very good student. He is studying full time and

expects to finish his degree in four years' time from today.

Required:

Determine how much Bill can withdraw every month while he is at Wits University.

I. If the first withdrawal occurs today (3 marks)

II. If the first withdrawal occurs at the end of the month (2 marks)

b) Suppose you are given the following information:

Current market price of a share= R200 000

Option's exercise price = R300 000

Time until the option expires= 5 yrs Risk-free rate =4%

Standard deviation of the returns on the share = 0.35

Required:

i.	Calculate d1 and d2	(3 marks)
ii.	Suppose N(d1) =0.7517 and N(d2) =0.4602; calculate the price of the call option on the share	(3 marks)

c)

The current stock price of Bismarck Industries is R200. At the end of the year, the stock price will either be R260 or R160. Suppose the risk-free rate is 5%; A call option on the stock that expires in 1(one) year has a strike price of R210.

Required:

Calculate the price of the call option.