2. (a) Let the following be observed for the stock price of ZPZ-Bank this day: P = £5.50 (The current stock price) X = £5.20 (The exercise price) r = 6 (The continuously compounded interest rate) t = 0.25 (the one-quarter of a year) = 0.25 (the continuously compounded variance of the stock return) = 0.5 (the standard deviation of the stock return) Using the above information and the following Black-Scholes option pricing formula: C = SN(d,)– Xe" N(d,) (i) determine the fair value of a three-month call option, (ii) determine the fair value of a three-month put option, (iii) Briefly explain how an options trader could take advantage of changes in the volatility of the underlying stock price.
2. (a) Let the following be observed for the stock price of ZPZ-Bank this day: P = £5.50 (The current stock price) X = £5.20 (The exercise price) r = 6 (The continuously compounded interest rate) t = 0.25 (the one-quarter of a year) = 0.25 (the continuously compounded variance of the stock return) = 0.5 (the standard deviation of the stock return) Using the above information and the following Black-Scholes option pricing formula: C = SN(d,)– Xe" N(d,) (i) determine the fair value of a three-month call option, (ii) determine the fair value of a three-month put option, (iii) Briefly explain how an options trader could take advantage of changes in the volatility of the underlying stock price.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 3P
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Transcribed Image Text:2. (a) Let the following be observed for the stock price of ZPZ-Bank this day:
P = £5.50 (The current stock price)
X = £5.20 (The exercise price)
r = 6 (The continuously compounded interest rate)
t = 0.25 (the one-quarter of a year)
= 0.25 (the continuously compounded variance of the stock return)
= 0.5 (the standard deviation of the stock return)
Using the above information and the following Black-Scholes option pricing formula:
C = SN(d,)- Xe"N(d,)
(i) determine the fair value of a three-month call option,
(ii) determine the fair value of a three-month put option,
(iii) Briefly explain how an options trader could take advantage of changes in the volatility of the
underlying stock price.
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