Question: Youve just been introduced to the Black-Scholes option pricing model and want to give it a try, and would like to use it to calculate

You’ve just been introduced to the Black-Scholes option pricing model and want to give it a try, and would like to use it to calculate the value of a call option on TriHawk stock. Currently, TriHawk’s common stock is selling for $25.00 per share, and the call option you are considering has an exercise or strike price of $20.00 with a maturity of 90 days or .25 year. In addition, you have calculated the (annualized) variance in its stock returns to be .09. If the risk-free rate of interest is 4 percent, what would the value of this call option be? How would your answer change if there was only one month left to expiration, but everything else remained the same? Now, what would happen to the value of this call option if the annualized variance in stock returns was .15 rather than .09?

Step by Step Solution

★★★★★

3.39 Rating (174 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

This problem like 2010 uses the BlackScholes model on three different scenarios Here however we will ... View full answer

Question Has Been Solved by an Expert!

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

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

344-B-F-F-M (5136).docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

Hasbro designs, manufactures, and markets toys and games for children and adults in the United States and in international markets. Hasbros portfolio of brands and products contains some of the most...

In Problem 17.22, how would your answer change if the marginal cost of the public good is $60? What if the marginal cost is $350?

Use DerivaGem to calculate the value of an American put option on a nondividend paying stock when the stock price is $30, the strike price is $32, the risk-free rate is 5%, the volatility is 30%, and...

The risk free rate of interest (continuously compounded) is 5%.Does put- call parity hold for the April options with strike price $50, and strike price $65 (calculations based on 71 days to maturity,...

You've just been introduced to the Black - Scholes option pricing model and want to give it a try, and would like to use it to calculate the value of a call option on TriHawk stock. Currently,...

(Valuing call options) (Related to Checkpoint 20.3 on page 686) Youve just been introduced to the Black-Scholes option pricing model and would like to use it to calculate the value of a call option...

A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee, Fethe's current value of operations, which is also its value of...

(1.) Using the binomial model, what are the ending values of the stock price? What are the payoffs of the call option? Current stock price, P = Risk-free rate, PRF = Strike price, X = Up factor for...

Kangema Dairies has decided to upgrade its milk Pasteurizing machinery from a firehood heated equipment to electric machinery. The following costs were incurred in acquiring the new machinery on 5...

The following items are associated with a cost accounting information system: a. Usage of direct materials b. Assignment of direct materials cost to each product c. Direct labor cost incurrence d....

Which of the following statements about your company's assembly coerations for cameras and drones is FAL SE ? The manufacturers of robots have recently developed small robots capable of performing...

Part 2. Martin Inc. purchased a new truck on April 30, 2020, by trading in its old model and paying the balance in cash. The following data relate to the transaction: List price of new truck $6,800...

Show Attempt History Current Attempt in Progress At December 31, 2022, Novak Company reported the following as plant assets Land $4,470,000 Buldings $28.860,000 Less: Accumulated...

In recent years, Flint Transportation purchased three used buses. Because of frequent turnover in the accounting department, a different accountant was in charge of selecting the depreciation method...

Emilio Corporation has the following information about the purchase of a new piece of equipment: Cash revenues less cash expenses $300,000 per year Cost of equipment $1,100,000 Salvage value at the...

Unit 6 Study Exercises QUESTION 6.1 (15 marks) The records for Oxtongue Inc. show the following data for calendar 2020: a) Gross profit on instalment sales recorded on the books was $100,000. Gross...

The ________________ is one of the largest owls in North America.

16-9A. (EBlT-EPS analysis) Two recent graduates of the computer science program at Ohio Tech are forming a company to write, market, and distribute software for various personal corn puters....

16-lOA. (Analysis ofrecessionary cash flows) The management of Idaho Produce is considering an increase in its use of financial leverage. The proposal on the table is to sell $10 million of bonds...

16-11A. (EBIT-EPS analysis) Four recent business school graduates have interested a group of venture capitalists in backing a small business enterprise. The proposed operation would consist of...

Exercise 14-23 (Algorithmic) (LO. 5) In its books, Ion Corporation reports income tax expense and income tax payable of $172,960 and $216,200, respectively. Assume that Ion will be able to use only...

Hurley Inc. is a wholesaler of motorcycle parts. The company uses a perpetual inventory system, and its fiscal year ends on December 31. Hurley had the following transactions during 2012 Transactions...

This information relates to Ivanhoe Co. 1. 2. 3. 4 On April 5, purchased merchandise from Pharoah Company for $24.200 on account. On April 7. purchased equipment on account for $25,800. On April 8,...