Question
The price for the January 2020 XYZ call option with exercise price of $105 is $10.98 as of July 2019. a. Use the Black-Scholes option
The price for the January 2020 XYZ call option with exercise price of $105 is $10.98 as of July 2019. a. Use the Black-Scholes option pricing formula to check the accuracy of this pricing. Price the option as of July 2019. Use the following inputs: P = 100, K = 105, interest rate (APR) = 5%, t = 0.5 year, and sigma = 39% for the continuously compounded annual return (0.39 in decimal form). Does the Black-Scholes formula suggest a higher or lower price for this option than the stated market price? b. Relative to the valuation in part (a) using the Black-Scholes formula, determine the call option price for the following change of assumptions: i. The stock price suddenly rises to $110. Explain the economic reason for this change in value. ii. The exercise price is changed to $110. Explain the economic reason for this change in value. iii. The annual interest rate falls to 4%. Explain the economic reason for this change in value. iv. The maturity of the call is increased to 1 year. Explain the economic reason for this change in value. v. The sigma changes to 30%. Explain the economic reason for this change in value
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