You are given the following information. S=50, X=59, simple annual risk free int

Question

You are given the following information. S=50, X=59, simple annual risk free interest rate is 5%, standard deviation of monthly stock returns is 10%. (Caution: must covert to annualized continuous compounding values)

1. what is the value of a one year European call option using the black scholes option pricing model?

show values of N(d1) and n(d2) using Excel and using the fomula provided in the lecture note.

2. Solving the value of the above one year American call using CBOE Options Toolbox

3. Nothing the Greek values: How will the call value change for

a. 1% change in interest rate

b. $1 increases in the stock price

c. Reduction of one day in maturity

4. All options are European and the stock does not pay a dividend. Which option is relatively more expensive? Explain. (hint: Compute implied volatiltiy).

a. S= $50, C(X=$60) =$14

b. S=$50, C(X=$65) = $10

Explanation / Answer

You are given the following information. S=50, X=59, simple annual risk free int

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