How many different volatilities would you expect to see for the stock? You are currently working for

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How many different volatilities would you expect to see for the stock?

You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and specialty products worldwide. Because of recent events, Mal Clissold, the company president, is concerned about the company’s risk, so he asks for your input.
In your discussion with Mal, you explain that the CAPM proposes that the market risk of the company’s stock is the determinant of its expected return. Even though Mal agrees with this, he argues that his portfolio consists entirely of Clissold Industry stock and options, so he is concerned with the total risk, or standard deviation, of the company’s stock. Furthermore, even though he has calculated the standard deviation of the company’s stock for the past five years, he would like an estimate of the stock’s volatility moving forward.
Mal states that you can find the estimated volatility of the stock for future periods by calculating the implied standard deviation of option contracts on the company stock.
When you examine the factors that affect the price of an option, all of the factors except the standard deviation of the stock are directly observable in the market. Mal states that because you can observe all of the option factors except the standard deviation, you can simply solve the Black–Scholes model and find the implied standard deviation.
To help you find the implied standard deviation of the company’s stock, Mal has provided you with the following option prices on four call options that expire in six months.
The risk-free rate is 4 percent, and the current stock price is $68.
Strike Price Option Price $65 $18.73 70 15.69 75 11.06 80 7.36

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Corporate Finance With Connect Access Card

ISBN: 978-1259672484

10th Edition

Authors: Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe

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