eBook Problem 16 07 Consider the following price data for TanCo stock in two different subperiods Subperiod A 168 420 162 750 162 450 161 695 160 740 157 610 157 235 157 680 161 165 162 500 157 635 156 770 157 590 155 490 150 510 155 730 154 445 155 885 156 180 152 535 150 690 150 715 Subperiod B 122 595 124 660 121 860 120 855 119 755 118 705 117 650 119 330 122 270 121 585 120 480 117 555 118 750 115 840 117 430 117 715 118 690 117 490 114 560 110 920 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 20 and the following characteristics X 115 S 124 75 time to expiration 62 days RFR 6 96 and dividend yield 3 75 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 to answer the question Do not round intermediate calculations Round your answer to the nearest cent $ The market price of $12 20 is Select higherlowerItem 4 than the calculated BS price This implies that if all of the other parameters of the model are correct, the implied BS volatility is Select higherlowerItem 5 than the historical volatility

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eBook Problem 16-07 Consider the following price data for TanCo stock in two different subperiods: Subperiod A : 168.420; 162.750; 162.450; 161.695; 160.740; 157.610; 157.235;

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Problem 16-07

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

Subperiod A: 168.420; 162.750; 162.450; 161.695; 160.740; 157.610; 157.235; 157.680; 161.165; 162.500; 157.635; 156.770; 157.590; 155.490; 150.510; 155.730; 154.445; 155.885; 156.180; 152.535; 150.690; 150.715

Subperiod B: 122.595; 124.660; 121.860; 120.855; 119.755; 118.705; 117.650; 119.330; 122.270; 121.585; 120.480; 117.555; 118.750; 115.840; 117.430; 117.715; 118.690; 117.490; 114.560; 110.920

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 $12.20 and the following characteristics: X = 115; S = 124.75; time to expiration = 62 days; RFR = 6.96%; and dividend yield = 3.75%. 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 to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent.

$

The market price of $12.20 is -Select-higherlowerItem 4 than the calculated BS price. This implies that if all of the other parameters of the model are correct, the implied BS volatility is -Select-higherlowerItem 5 than the historical volatility.