Question
Ronald owns 3,000 shares of Sierra Vista Corporation (SVC). The share price is $36.13, and this price has increased by 15% during the last year.
Ronald owns 3,000 shares of Sierra Vista Corporation (SVC). The share price is $36.13, and this price has increased by 15% during the last year. However, Ronald is worried that his shares may decline in value, but he wants to stay in the equity market for the longer term.
Ronald would like to purchase put options with an exercise price of $35.25 per share to protect against potential share losses. The option he is considering expires 150 days from now. Call options are also available on the shares, with the same exercise price and expiry date. The continuously compounded riskfree rate is 3% per year. The annual standard deviation of the continuously compounded rate of return on SVC shares is 20%.
a. Use the Black-Scholes option-pricing model to find the option premium for the SVC call option.
b. What is the time value of this option?
c. What is the value of a put option using BSM?
d. What is the value of a put option based on put-call parity?
e. What is the time value of this option?
f. What are the values of the greeks? i. delta ii. gamma iii. vega
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