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The Dow Jones Industrial Average on July 20, 2016 was 18,580 and the price of a September

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The Dow Jones Industrial Average on July 20, 2016 was 18,580 and the price of a September 185 (European) call option on the index was $3.35. Use the DerivaGem software to calculate the implied volatility of this option. Assume that the risk-free rate was 0.7% and the dividend yield was 2.75%. The option expires on September 16, 2016. Estimate the price of a September 185 put. What is the volatility implied by the price you estimate for this option?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Options on the DJIA are European There are 42 trading days between July 20 201...View the full answer


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Options Futures and Other Derivatives

Options Futures and Other Derivatives

ISBN: 978-0134472089

10th edition

Authors: John C. Hull

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Related Video

A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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