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Question 5. a. Find the Black-Scholes value of a put option on the following non-dividend paying stock: Time to maturity: 6 months Standard Deviation: 50%
Question 5. a. Find the Black-Scholes value of a put option on the following non-dividend paying stock: Time to maturity: 6 months Standard Deviation: 50% per year Exercise price: $50 Current stock price: $50 Interest rate: 10% (4 marks) b. You found that the put option is trading at the fair value you calculated in part a) but the call option with the same exercise price and maturity is currently selling for 9 dollars. Is there an arbitrage opportunity? If so, identify a trading strategy. Explain what actions you would take at the inception and expiry of the strategy to capture an arbitrage profit and calculate the amount of this profit. Show that your strategy eliminates all risk irrespective of the value of the underlying stock at the maturity of the put and call options. (4 marks) c. You decided to establish a position (unrelated to part a and b) by buying a share of the stock for $50, buying a 6-month put option with exercise price $45, and writing a 6- month call option with exercise price $55. Explain what is the maximum payoff (not profit and loss) of this position? (4 marks) Question 5. a. Find the Black-Scholes value of a put option on the following non-dividend paying stock: Time to maturity: 6 months Standard Deviation: 50% per year Exercise price: $50 Current stock price: $50 Interest rate: 10% (4 marks) b. You found that the put option is trading at the fair value you calculated in part a) but the call option with the same exercise price and maturity is currently selling for 9 dollars. Is there an arbitrage opportunity? If so, identify a trading strategy. Explain what actions you would take at the inception and expiry of the strategy to capture an arbitrage profit and calculate the amount of this profit. Show that your strategy eliminates all risk irrespective of the value of the underlying stock at the maturity of the put and call options. (4 marks) c. You decided to establish a position (unrelated to part a and b) by buying a share of the stock for $50, buying a 6-month put option with exercise price $45, and writing a 6- month call option with exercise price $55. Explain what is the maximum payoff (not profit and loss) of this position? (4 marks)
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