XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $60 per share. A call option on XYZ has an exercise price of $55 and 3-month time to expiration. The risk-free interest rate is .5% per month, and the stock’s volatility (standard deviation) = 7% per month. Find the Black-Scholes value of the option. (Hint: Try defining one “period” as a month, rather than as a year, and think about the net-of-dividend value of each share.)
XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $60 per share. A call option on XYZ has an exercise price of $55 and 3-month time to expiration. The risk-free interest rate is .5% per month, and the stock’s volatility (standard deviation) = 7% per month. Find the Black-Scholes value of the option. (Hint: Try defining one “period” as a month, rather than as a year, and think about the net-of-dividend value of each share.)
Chapter20: Financing With Derivatives
Section20.A: The Black-scholes Option Pricing Model
Problem 1P
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XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $60 per share. A call option on XYZ has an exercise price of $55 and 3-month time to expiration.
The risk-free interest rate is .5% per month, and the stock’s volatility (standard deviation) = 7% per month. Find the Black-Scholes value of the option. (Hint: Try defining one “period” as a month, rather than as a year, and think about the net-of-dividend value of each share.)
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