(Do this example only if you’ve studied Chapter 17–20 on option pricing.)

The Black–Scholes option pricing model, defined in Chapter 19, prices call and put options based on five parameters:

• S, the stock price today

• X, the option’s exercise price (also called the option’s strike price)

• T, the option’s expiration date

• r, the interest rate

• σ (“Sigma”), the riskiness of the stock These inputs and the resulting call and put prices are highlighted below.
Your assignment: Use Data Table to create tables showing the sensitivity of the call and put prices to the various inputs. Here are some suggestions:

a. Using the parameters shown below, what are the call and put prices given σ = 10%, 15%, 20%, . . ., 80%?

b. Using the parameters shown below, what are the call and put prices when T = 0.1, 0.2, 0.3, . . ., 1?

Transcribed Image Text:

A 1 2 S 3 X 4 T 5 r 6 Sigma 7 8 d 9 d 10 B The Black-Scholes Option-Pricing Formula 100 Current stock price 90 Exercise price 0.50000 Time to maturity of option (in years) 4.00% Risk-free rate of interest 35% Stock volatility 0.6303 (LN(S/X)+(r+0.5* sigma^2)*T)/(sigma SQRT(T)) 0.3828