Homework 7

1. What is the value of the following call option according to the Black Scholes Option Pricing Model? What is the value of the put options?

Stock Price = $62.50

Strike Price = $60.00

Time to Expiration = 9 Months = 0.75 years.

Risk-Free Rate = 2.0%.

Stock Return Standard Deviation = 0.45.

2. Draw the payoff picture at expiration for a long position in a call option that has a premium of $1.75 and a strike price of $40.

3. Draw the payoff picture for a short position in the call option given in Problem 2.

4. Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $35.

5. Draw the payoff picture for a short position in the put option given in Problem 4.