Study Questions for Itos Dilemma Case

1. Does the model yield logical estimates with respect to intrinsic value and time-to- maturity? What happens to the option premiums as you change the volatility? Can you explain why volatility affects prices in such a manner?

ITO'S DILENIMA Weekly Prices and Returns for Duke Energy, IBM and Microsoft Week No. Dat ke Energy IBM Microsoft Duke Energy IBM Microsoft 0 Weekly Sigma of Retums returns Stock Prices & Returns Option Prices 0 Exhibit 2 ITO'S DILEMMA n Premium and Market Data for February 20, 2001 Call Premiums Put Premiums Duke Energy 2.27 40 2.27 42.5 2.70 2.27 45 1.25 4.30 5.30 3.90 4.80 2.40 3.30 0.75 2.40 1.30 2.25 0 IBM 108.90 100 12.00 14.10 18.70 108.90 110 4.40 108.90 120 1.10 8.10 11.40 3.60 7.50 2.20 4.30 7.00 5.30 8.1010.50 12.20 13.90 15.60 4 Microsoft 8.13 55.19 50 6.50 55.19 553.00 55.19 60 0.94 10.00 6.88 1.19 2.50 4.00 2.69 4.13 6.00 5.38 6.758.13 2.384.50 9 Tbill rates 0 Expiration date 17-Mar 1 Days to expiration25 4.92% 4.85% 4.91% 21-Apr 21-Jul 4.92% 4.85% 4.91% 17-Mar 21-Apr 21-Jul 151 Stock Prices & Returns Option Prices + ITO'S DILENIMA Weekly Prices and Returns for Duke Energy, IBM and Microsoft Week No. Dat ke Energy IBM Microsoft Duke Energy IBM Microsoft 0 Weekly Sigma of Retums returns Stock Prices & Returns Option Prices 0 Exhibit 2 ITO'S DILEMMA n Premium and Market Data for February 20, 2001 Call Premiums Put Premiums Duke Energy 2.27 40 2.27 42.5 2.70 2.27 45 1.25 4.30 5.30 3.90 4.80 2.40 3.30 0.75 2.40 1.30 2.25 0 IBM 108.90 100 12.00 14.10 18.70 108.90 110 4.40 108.90 120 1.10 8.10 11.40 3.60 7.50 2.20 4.30 7.00 5.30 8.1010.50 12.20 13.90 15.60 4 Microsoft 8.13 55.19 50 6.50 55.19 553.00 55.19 60 0.94 10.00 6.88 1.19 2.50 4.00 2.69 4.13 6.00 5.38 6.758.13 2.384.50 9 Tbill rates 0 Expiration date 17-Mar 1 Days to expiration25 4.92% 4.85% 4.91% 21-Apr 21-Jul 4.92% 4.85% 4.91% 17-Mar 21-Apr 21-Jul 151 Stock Prices & Returns Option Prices +