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You have been given the following information on a call option on the stock of Puckett Industries: P = $65 X = $70 t =
You have been given the following information on a call option on the stock of Puckett Industries: | |||||||||||
P = | $65 | X = | $70 | ||||||||
t = | 0.5 | rRF = | 5% | ||||||||
s = | 50.00% | ||||||||||
a. Using the Black-Scholes Option Pricing Model, what is the value of the call option? | |||||||||||
First, we will use formulas from the text to solve for d1 and d2. | |||||||||||
Hint: use the NORMSDIST function. | |||||||||||
(d1) | = | N(d1) = | d1 = | { ln (P/X) + [rRF + s2 /2) ] t } / (s t1/2) | |||||||
(d2) | = | N(d2) = | d2 = | d1 - s (t 1 / 2) | |||||||
Using the formula for option value and the values of N(d) from above, we can find the call option value. | |||||||||||
VC | = | VC = | P[ N (d1) ] - X e-r t [ N (d2) ] | ||||||||
b. Suppose there is a put option on Puckett's stock with exactly the same inputs as the call option. What is the value of the put? | |||||||||||
Put option using Black-Scholes modified formula | = | Put = | P[ N (d1) - 1 ] - X e-r t [ N (d2) -1 ] | ||||||||
Put option using put-call parity | = | VP = VC - P + X exp(-rRF t) | |||||||||
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