Consider the following price data for TanCo stock in two different subperiods Subperiod A 168 000 162 560 162 630 161 610 160 585 157 705 157 005 157 880 161 140 162 415 157 520 156 690 157 655 155 275 150 430 155 710 154 165 155 595 156 390 152 555 150 440 150 420 Subperiod B 122 875 124 565 121 725 120 630 119 890 118 480 117 845 119 430 122 295 121 480 120 435 117 935 118 650 115 510 117 380 117 685 118 620 117 695 114 430 110 575 For each subperiod, calculate the annualized historical measure of stock volatility that could be used in pricing an option for TanCo In your calculations, you may assume that there are 250 trading days in a year Do not round intermediate calculations Round your answers to four decimal places Period A Period B Suppose now that you decide to gather additional data for each subperiod Specifically, you obtain information for a call option with a current price of $12 30 and the following characteristics X 114 S 121 425 time to expiration 62 days RFR 6 56 and dividend yield 3 90 Here the risk free rate and dividend yields are stated on an annual basis Use the volatility measure from Subperiod B and the Black Scholes model to obtain the fair value for this call option Based on your calculations, is the option currently priced as it should be Assume 365 days in a year You may use Appendix D (bottom of this page) to answer the question Do not round intermediate calculations Round your answer to the nearest cent $ The market price of $12 30 is (higher or lower) than the calculated BS price This implies that if all of the other parameters of the model are correct, the implied BS volatility is (higher or lower) than the historical volatility APPENDIX D

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Consider the following price data for TanCo stock in two different subperiods: Subperiod A : 168.000; 162.560; 162.630; 161.610; 160.585; 157.705; 157.005; 157.880; 161.140; 162.415;

Consider the following price data for TanCo stock in two different subperiods:

Subperiod A: 168.000; 162.560; 162.630; 161.610; 160.585; 157.705; 157.005; 157.880; 161.140; 162.415; 157.520; 156.690; 157.655; 155.275; 150.430; 155.710; 154.165; 155.595; 156.390; 152.555; 150.440; 150.420

Subperiod B: 122.875; 124.565; 121.725; 120.630; 119.890; 118.480; 117.845; 119.430; 122.295; 121.480; 120.435; 117.935; 118.650; 115.510; 117.380; 117.685; 118.620; 117.695; 114.430; 110.575

For each subperiod, calculate the annualized historical measure of stock volatility that could be used in pricing an option for TanCo. In your calculations, you may assume that there are 250 trading days in a year. Do not round intermediate calculations. Round your answers to four decimal places.

Period A:_____

Period B:_____
Suppose now that you decide to gather additional data for each subperiod. Specifically, you obtain information for a call option with a current price of $12.30 and the following characteristics: X = 114; S = 121.425; time to expiration = 62 days; RFR = 6.56%; and dividend yield = 3.90%. Here the risk-free rate and dividend yields are stated on an annual basis. Use the volatility measure from Subperiod B and the Black-Scholes model to obtain the "fair value" for this call option. Based on your calculations, is the option currently priced as it should be? Assume 365 days in a year. You may use Appendix D (bottom of this page) to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent.

$ ______

The market price of $12.30 is (higher or lower) than the calculated BS price. This implies that if all of the other parameters of the model are correct, the implied BS volatility is (higher or lower) than the historical volatility.

APPENDIX D

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