Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

2.(a) Find a stock that pays a dividend and estimate the continuously compounded dividend payment rate (for example, q=.02). Using the Black/Scholes option pricing model,

2.(a) Find a stock that pays a dividend and estimate the continuously compounded dividend payment rate (for example, q=.02). Using the Black/Scholes option pricing model, estimate the price of an at the money call option and put option that have the same exercise price and maturity date. Assume r=.01 and use the appropriate S0, t, K. For volatility, use the current VIX. (Note: you should use the Black/Scholes model with dividends in pricing the options)

(b) Evaluate how well the Black/Scholes model worked by comparing the results to the midpoints of the bid-ask prices.

(c) Find (through trial and error), the implied volatility (i.e., the volatility that equates the current call price and put price with the estimates from the Black/Scholes formula).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance Applications and Theory

Authors: Marcia Cornett

4th edition

1259691411, 978-1259691416

More Books

Students also viewed these Finance questions

Question

Define Administration?

Answered: 1 week ago