8.

Question 9

Calculate the price of a 4-month European call option on a dividend-paying stock with a strike price of $30 when the current stock price is $32, the risk-free rate is 6% per annum and the volatility is 40% per annum. A dividend of $2.00 is expected in 2 months. Use Black-Scholes formula.

$3.05

$3.65

$4.32

$5.02

9.

Time to expiration is a factor to the option price.

True

False

10. A call option expiring in 2 months has a market price of $10.27. The current stock price is $50, the strike price is $40, and the risk-free rate is 4% per annum. Calculate the implied volatility.

20%

25%

30%

35%

2.

The following put-call parity holds for American options.

c + K e^(-rT) = p + S0

True

False

3.

American put options should be priced using Black-Scholes option formula.

True

False

4. A stock price is currently $46. Over each of the next 2 6-month periods it is expected to go up by 10% or down by 10%. The risk-free rate is 6% per annum with continuous compounding. What is the value of a 1-year European call option with a strike price of $50?

5. Consider a 3-month European put option on a non-dividend-paying stock, where the stock price is $50, the strike price is $50, the risk-free rate is 3% per annum. Stock price will either move up by 10% or down by 5%, every month. Price the put with binomial trees.

$2.10

$2.52

$2.94

$3.37

6.

For an American style option, if the current exercise payoff is larger than the remaining option value, then one should early exercise it.

True

False

7.

One can use binomial pricing method to price American call/put options.

True

False

4. Consider a 7-month $110 American put option on a non-dividend-paying stock. Currently, the stock price is $100 and its volatility is 40%. The risk-free rate is 3% per annum. Price the put using a 10-step binomial trees. . $14.55 $15.36 $17.65 $18.40