Asked Dec 1, 2019

A stock is selling today for $30. The stock has an annual volatility of 70 percent and the annual risk-free rate is 11 percent. Calculate the time value for a 9 month European call option with an exercise price of $25.


Expert Answer

Step 1

Calculation of Time Value of European Call Option:

The time value of European call option is $10.38.

Excel Spreadsheet:


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A B 1 Stock Price $30 2 Exercise Price $25 3 Period 0.75 4 Riskfree Rate 11% 5 Standard Deviation 70% 6 PV of Exercise Price 23.02028595 7 Square of Time 0.606217783 0.739951169 8 d1 0.133733386 9 d2 10 N(dl) 11 N(d2) 0.770335188 12.7346679 $10.38 Value of Call 12 $3.40 Value of Put 13


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