Question
How to answer these questions in excel (a). A call option is written on a stock whose current price is 50. The option has a
How to answer these questions in excel
(a). A call option is written on a stock whose current price is 50. The option has a maturity of 2 years, and during the first year time the annual stock price is expected to increase by 25% or to decrease by 10%. The same is expected in the second year. The annual interest rate is constant at 3% for both years. The option is exercisable at Date 1 at a price of 55 and at Date 2 for a price of 60.
(i) What is the value of the call option today?
(ii) Will you ever exercise this option early?
(b). A put option with 1 year to maturity is written on a stock. The current underlying stock price is 20. The option exercise price is 18, the interest rate is 3.74% and the stock volatility is 32.7%. The price of the call option written on the same stock with the same exercise price and time to maturity is 3.80. Use the Black and Scholes model to determine whether the Put-Call parity holds.
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