The following data relate to a listed company. • Current share price = $160 • Exercise price = $190 • Maturity = 6 months • Risk free rate of return = 5% per annum • Dividend yield = 3% per annum • Standard deviation of share returns = 40% Answer ALL Sub parts: Using the above data, estimate the value of a call option Using the calculated call option price and other relevant data, estimate the price of a put option using the put-call parity relationship. If the market value of the put option is $1 less than the value of the put option estimated in ii above, explain if there are any arbitrage opportunities. If there are arbitrage opportunities, explain the strategy you would follow to profit from it. Show detailed calculations to justify your answer.

The following data relate to a listed company. • Current share price = $160 • Exercise price = $190 • Maturity = 6 months • Risk free rate of return = 5% per annum • Dividend yield = 3% per annum • Standard deviation of share returns = 40% Answer ALL Sub parts: Using the above data, estimate the value of a call option Using the calculated call option price and other relevant data, estimate the price of a put option using the put-call parity relationship. If the market value of the put option is $1 less than the value of the put option estimated in ii above, explain if there are any arbitrage opportunities. If there are arbitrage opportunities, explain the strategy you would follow to profit from it. Show detailed calculations to justify your answer.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 10P

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You are given the following information about the stock of Company ABC: Share price $80 risk free rate of interest is 6%, time to expiration is 6 months, annualised standard deviationis 0.5 and exercise price is $85. Calculate the appropriate call value of the stock according to the Black-Scholes option pricing formula. (Show your workings in full) Calculate an appropriate put premium. (Show your workings in full)
J-Rata Corp shares are currently trading at $30 each. It is expected to increase by 10% or decrease by 6% during the next two-three months. If its strike price at maturity in six months is set as $32 and the risk free rate is 8% per annum for all maturities: (a) Calculate its call options price and its put option price currently (b)Test and prove that the put-call parity is holding based on your option pricing.
The stocks of Cee Mobile Limited is currently trading at $73 each. The call option on the company’s stock has an exercise price of $70, with fifty (50) days remaining to expiration. It is assumed that the yield on treasury bills is currently 2%, while the volatility of the stock price is estimated as being 35%. a. Using the Black-Scholes-Merton (BSM) model, calculate the value of the Call option, given the above parameters. Show all relevant workings. b. Of the value computed, how much is the intrinsic value and the time value of the Call option? c. Using the BSM model and the information given above, calculate the value of the Put option on the stock, with a similar strike price and days to expiration.
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