Use the Black–Scholes formula to value the following options:

a. A call option written on a stock selling for $60 per share with a $60 exercise price. The stock’s standard deviation is 6% per month. The option matures in three months. The risk-free interest rate is 1% per month.

b. A put option written on the same stock at the same time, with the same exercise price and expiration date.

PROBLEM SETS F. Black, “How to use the Holes in Black–Scholes,” Journal of Applied Corporate Finance 1

(Winter 1989), pp. 67–73.

There are a number of good books on option valuation. They include:

J. Hull, Options, Futures and Other Derivatives, 7th ed. (Englewood Cliffs, NJ: Prentice-Hall, Inc., 2008).

R. L. McDonald, Derivatives Markets, 2nd ed. (Reading, MA: Pearson Addison Wesley, 2005).

P. Wilmott, Paul Wilmott on Quantitative Finance, 2nd ed. (New York: John Wiley & Sons, 2006).

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Visit us at www.mhhe.com/bma 546 Part Six Options Now for each of these options find the combination of stock and risk-free asset that would replicate the option.

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