Question
Consider a stock of ABC Company. It has an expected return of 10% per year, and it has an estimated return volatility of 20% per
Consider a stock of ABC Company. It has an expected return of 10% per year, and it has an estimated return volatility of 20% per year. The risk-free rate is 6% per year (CCR). ABC stock has a current price of $100 and has declared dividends of $13 to be paid at the end of each year.
- Find the value of a European call option expiring in 2 years with a strike price of $110 using the Black-Scholes-Merton model.
- Construct a tracking portfolio (at the current time t = 0) using ABC stock and the risk-free asset to replicate the above call option based on the BSM model.
- Find the value of a European put option expiring in 2 years with a strike price of $110 using the BSM model.
- Find the value of an American call option expiring in 2 years with a strike price of $110 using the (pseudo) BSM model.
- Suppose the European call price in the market is actually $3.00. What is the return volatility implied by this price and the BSM model?
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Intermediate Financial Management
Authors: Eugene F. Brigham, Phillip R. Daves
11th edition
978-1111530266
