{ "key_pair_value_system": true, "answer_rating_count": "", "question_feedback_html": { "html_star": "", "html_star_feedback": "" }, "answer_average_rating_value": "", "answer_date_js": "2024-06-05T12:03:28-04:00", "answer_date": "2024-06-05 12:03:28", "is_docs_available": "", "is_excel_available": "", "is_pdf_available": "", "count_file_available": 0, "main_page": "student_question_view", "question_id": "2289135", "url": "\/study-help\/questions\/-2289135", "question_creation_date_js": "2024-06-05T12:03:28-04:00", "question_creation_date": "Jun 05, 2024 12:03 PM", "meta_title": "[Solved] BE332-6-AU\/S QUESTION FOUR a) Explain how | SolutionInn", "meta_description": "Answer of - BE332-6-AU\/S QUESTION FOUR a) Explain how volatility affects the values of call and put options. (7 marks) b) A bull s | SolutionInn", "meta_keywords": "be332-6-au\/s,question,four,volatility,affects,values,call,put,options,7,marks,bull", "question_title_h1": "BE332-6-AU\/S QUESTION FOUR a) Explain how volatility affects the values of call and put options. (7 marks) b) A bull spread strategy is created by", "question_title": "BE332-6-AU\/S QUESTION FOUR a) Explain how volatility affects the values of call", "question_title_for_js_snippet": "BE332 6 AU S QUESTION FOUR a) Explain how volatility affects the values of call and put options (7 marks) b) A bull spread strategy is created by buying a European call option on a stock with a certain strike price and selling a European call option on the same stock with a higher strike price Both options have the same expiration date Suppose that an investor buys for $3 a 3 month European call with a strike price of $30 and sells for El a 3 month European call with a strike price of 635 1 What is the total payoff of this bull spread strategy if the strike price in 3 months is (39 (6 marks) ii What is the net profit to this strategy (4 marks) c) The Black Scholes formula for a European call option on a non dividend paying stock is C S,N(d,) Xe N(d, ), where So is the stock price, X is the strike price, I is the time to maturity of the option , N( ) is the cumulative standardized normal distribution, In(S, X) (r 6' 2)1 and d, d, GVT , r is the risk free rate of interest and o is volatility Use the Black Scholes formula to find the price of a European call option on a non dividend paying stock when the stock price is $26, the strike price is $25, the risk free interest rate is 6 per annum, the volatility is 15 per annum, and the time to maturity is 3 months (8 marks) Total 25 marks ", "question_description": "
\"image\"<\/div><\/div><\/div><\/figure> BE332-6-AU\/S QUESTION FOUR a) Explain how volatility affects the values of call and put options. (7 marks) b) A bull spread strategy is created by buying a European call option on a stock with a certain strike price and selling a European call option on the same stock with a higher strike price. Both options have the same expiration date. Suppose that an investor buys for $3 a 3-month European call with a strike price of $30 and sells for El a 3-month European call with a strike price of 635. 1 . What is the total payoff of this bull spread strategy if the strike price in 3 months is (39? (6 marks) ii. What is the net profit to this strategy? (4 marks) c) The Black-Scholes formula for a European call option on a non-dividend-paying stock is: C-S,N(d,)-Xe \"N(d, ), where So is the stock price, X is the strike price, I is the time to maturity of the option , N(.) is the cumulative standardized normal distribution, In(S,\/X)+(r+6' \/2)1 - and d, = d, - GVT , r is the risk free rate of interest and o is volatility. Use the Black-Scholes formula to find the price of a European call option on a non-dividend- paying stock when the stock price is $26, the strike price is $25, the risk-free interest rate is 6% per annum, the volatility is 15% per annum, and the time to maturity is 3 months. (8 marks) [Total: 25 marks]", "transcribed_text": "", "related_book": { "title": "Financial and Managerial Accounting the basis for business decisions", "isbn": "125969240X, 978-1259692406", "edition": "18th edition", "authors": "Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/1245.jpg", "uri": "\/textbooks\/financial-and-managerial-accounting-the-basis-for-business-decisions-18th-edition-1245", "see_more_uri": "" }, "free_related_book": { "isbn": "1138073954", "uri": "\/textbooks\/ecosystems-and-human-health-3rd-edition-978-1138073951-269786", "name": "Ecosystems And Human Health", "edition": "3rd Edition" }, "question_posted": "2024-06-05 12:03:28", "see_more_questions_link": "\/study-help\/questions\/business-marketing-2022-June-08", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/at-december-31-2010-ambuir-corporation-had-a-future-tax", "description": "At December 31, 2010, Ambuir Corporation had a future tax liability of $35,000. 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