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Financial Derivatives. Please answer all questions. Thank you. 5._(8 points: Please use Black-Scholes-Merton formula for this question and keep your answers to the 4 digits.)

Financial Derivatives. Please answer all questions. Thank you. image text in transcribed
5._(8 points: Please use Black-Scholes-Merton formula for this question and keep your answers to the 4 digits.) ABC is a non-dividend-paying stock that has the potential to be taken over. Current stock price is $100/share; the risk-free interest rate is 5% per annum with continuous compounding; the volatility is 10% per month; and the time to maturity is 0.5 years. Your manager wants you to construct a strip using the at-the- money European options. How much is the cost of constructing this strip? More specifically, 2. What is the value of So, K, 1, 0, T, d, and dz in the Black-Scholes-Merton formula respectively? b. What is the value for N(d) and N(d2), respectively? What is the price of this European call option? What is the price of this European put option? c. What is the total cost of the strip? d. Suppose ABC is bought out by another firm at maturity and the stock price at maturity is $130, what is the percentage return to your strip

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