Question: - Suppose there is a call option on Microsoft (MSFT) stock. The option has a strike price of $200. At the same time, a US

- Suppose there is a call option on Microsoft (MSFT) stock. The option has a strike price of $200. At the same time, a US Treasury Bill with the same maturity date has an annualized return of 4.00%. For simplicity, you can assume that there are exactly 7 months (or 210 days) to the maturity of the option.

a) Assuming that the correct standard deviation to use in the Black-Scholes formula is 30% annually, calculate the price of the call option described above assuming that the option has a European exercise structure. The price of the MSFT stock is $234.00 at the time the option was quoted.

b) Suppose that you believe the historical annual standard deviation of MSFT stock, 25%, should be used as the volatility variable in the formula when calculating the Black-Scholes price. What will be the price of the same option under this new volatility measure?

c) Calculate the price of a put option that has the same strike price and maturity as the call option above. Use the historical standard deviation in your calculation.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Suppose there is a call option on Microsoft (MSFT) stock. The option has a strike price of $200. At the same time, a US Treasury Bill with the same maturity date has an annualized return of 4.00%....

Suppose there is a call option on Microsoft (MSFT) stock. The option has an exercise price of $240. At the same time, a US Treasury bill with the same maturity date has an annualized rate of 4%. For...

Everything else held constant, if the Fed unexpectedly announces that it is worried about the economy potentially falling into a recession , you would expect stock prices to _____. A. remain constant...

Question 45 2 pts Suppose you have a call option written on a non-dividend paying stock with a strike price of X and a strike date of T. The current time is t, the current stock price is St and...

How is purchasing a forward contract on wheat different from purchasing wheat? FIN 410 - Problem Set 3 1. How is purchasing a forward contract on wheat different from purchasing wheat? 2. What would...

Dosley Endowment Fund, which supports the activities of the Dosley Charitable Trust, is relatively new and small in terms of assets under management. The trustees of the endowment have adopted a...

For capital budgeting purposes, which of these is considered a cash inflow? A decrease in the cash balance An increase in accounts receivable An increase in inventory A decrease in accounts payable...

Investors use options and stocks, based on the range in which a stock is likely to go up or go down, to create portfolios that help them generate riskless payoffs. This is called creating a hedge...

Consider the following options portfolio: You write and sell a November 2023 call option on Microsoft common stock with an exercise price of $140. You also write and sell a November 2023 put option...

Describes several aspects of policies, tools, and implementation for a sustainable supply chain strategy. please select one of these that is interesting to you and discuss the linkages. If you have...

The compression ratio in an air standard Otto cycle is 8. At the beginning of the compression stroke, the pressure is 101 kPa and the temperature is 289 K. The heat transfer to the air per cycle is...

You look on Schwab and see that an IBM bond due 2 0 4 4 is priced at $ 9 7 . How much money would it actually take to buy one of those IBM bonds?

Find the radius of gyration of a plate covering the region bounded by x=3, x=5, y=0, and y=4 with respect to the y-axis.

3. To what extent do you think Andy and Martha feel listened to by the other? Apply what youve learned in this chapter by analyzing the following case study, using the accompanying questions as a...

Discuss the determinants of direct financial compensation.

3. Interview a professional in the fi eld you plan to enter or return to after completing college. Ask your interviewee to describe the kind of climate that is most effective in his or her work...