The stock price of T-Mac Corporation is $100. The annualized standard deviation of the stock return is 50%. A call option with 9 months time to maturity and $95 strike price is on the stock. You are interested in the call option price under the Black-Scholes model. The risk-free rate provided by your trading platform is 6.18364452348442% per annum, but with annual compounding:

(a)  What is the interest rate per annum under continuous compounding? 

(b)  What is the price of the call?

(c)  What is the price of the put with the same underlying, strike price, time to maturity, under continuous compounding framework? 

(d)  Recalculate the price of the put with the same underlying, strike price, time to maturity, under annual compounding. Have you arrived at the same answer?

Answer rating: 100% (QA)

a To convert the annual interest rate with annual compounding to the interest rate with continuous compounding we use the formula rc ln1 ra where rc i... View the full answer