Question
A market-maker stands ready to sell to buyers and to buy from sellers. Suppose there is a market-maker who manage options on ABC stock. Its
A market-maker stands ready to sell to buyers and to buy from sellers. Suppose there is a market-maker who manage options on ABC stock. Its current stock price is $52.5 and it pays no dividends. Assume the risk free rate is 3%. Consider 30-day European call option with exercise price $50 and its premium is $3.36. Suppose that a customer wishes to buy a 90-day European put option on ABC stock with exercise price $50 and the market maker fills this order by selling a put option. The put option, however, has never been traded in the market and the market maker 1 must provide the reasonable price to the customer. That is, the market maker needs to compute the fair price and uses the Black-Scholes pricing formula for the calculation. Compute the fair price for the 90-day European put option with exercise price $50 using the Black-Scholes formula.
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