Look at the stocks listed in Table 7.3. Pick at least three stocks, and find call option

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Look at the stocks listed in Table 7.3. Pick at least three stocks, and find call option prices for each of them on finance.yahoo.com. Now find monthly adjusted prices and calculate the standard deviation from the monthly returns using the Excel function STDEV.P. Convert the standard deviation from monthly to annual units by multiplying by the square root of 12.

a. For each stock, pick a traded option with a maturity of about six months and an exercise price equal to the current stock price. Use the Black–Scholes formula and your estimate of standard deviation to value each option. If the stock pays dividends, remember to subtract from the stock price the present value of any dividends that the option holder will miss out on. How close is your calculated value to the traded price of the option?

b. Your answer to part (a) will not exactly match the traded price. Experiment with different values for the standard deviation until your calculated values match the prices of the traded options as closely as possible. What are these implied volatilities? What do the implied volatilities say about investors’ forecasts of future volatility?

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Principles of Corporate Finance

ISBN: 978-1260013900

13th edition

Authors: Richard Brealey, Stewart Myers, Franklin Allen

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