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Question 1 (a) Flavour plc specialises in manufacturing luxury chocolates. Its shares currently trade at 10' each. A one-year call option on Flavour's share has
Question 1 (a) Flavour plc specialises in manufacturing luxury chocolates. Its shares currently trade at 10' each. A one-year call option on Flavour's share has an exercise price of 8. The standard deviation of Flavour's share is estimated to be 20% a year, and the risk-free interest rate is 15% per year. Using the Black-Scholes model, value the call option on Flavour Plc's share. Note: In 125 = 0-2221 (5 marks) (b) Explain clearly how each of the determinants in the Black-Scholes model might affect the price of a call option. grosor. (10 marks) (c) Derive the upper and lower bounds on the price of a European call option. (10 marks) Question 1 (a) Flavour plc specialises in manufacturing luxury chocolates. Its shares currently trade at 10' each. A one-year call option on Flavour's share has an exercise price of 8. The standard deviation of Flavour's share is estimated to be 20% a year, and the risk-free interest rate is 15% per year. Using the Black-Scholes model, value the call option on Flavour Plc's share. Note: In 125 = 0-2221 (5 marks) (b) Explain clearly how each of the determinants in the Black-Scholes model might affect the price of a call option. grosor. (10 marks) (c) Derive the upper and lower bounds on the price of a European call option. (10 marks)
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