Question
The current stock price is at RM8 with a volatility of 0.35. You buy a put option with the exercise price of RM7.5 and the
The current stock price is at RM8 with a volatility of 0.35. You buy a put option with the exercise price of RM7.5 and the time to expiration is 3 months from now. The risk-free interest rate is 2%. Answer the following questions.
(i) Use Black-Scholes option pricing model to compute the theoretical value of the put.
(ii) If the put price is RM4.5, is it under-or overpriced?
(iii)Discuss the two most critical assumptions made under Black Scholes Option Pricing model.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
i Using the BlackScholes option pricing model we can compute the theoretical value of the put First lets denote S Current stock price RM 8 K Exercise ...
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Step: 2
Step: 3
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
12th edition
978-0324597714, 324597711, 324597703, 978-8131518571, 8131518574, 978-0324597707
