Homework Problems: Options Markets

(Fin. 338)

1.

The stock of the McCall Corporation is currently trading at $42 per share. The stock’s volatility as measured by its standard deviation is 20%. If the strike (exercise) price for a certain set of options on McCall stock carry a strike price of $40, and the options run for 6 months (180 days), determine the Black-Scholes model values for: N (d1), N (d2), N (- d1), and N (- d2). (Assume the risk-free rate is 10% and that the stock pays no dividends.) Given the information in question one (1) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) one must pay for a call option (Ct) on McCall stock using the Black-Scholes model. b. How much of the call’s value is composed of intrinsic value? How much of the call’s value is composed of a time premium? (Explain how you determined these values.)

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Given the information in question one (1) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) of a put option (Pt) for McCall stock using the BlackScholes model. (Use the put/call parity model to confirm your answer.) b. How much of the put’s value (price) is composed of intrinsic value? How much of the put’s value is composed of a time premium? (Explain how you determined these values.)

4.

You are considering buying options on the stock of the Wallace & Fischer Corporation, a producer of jet aircraft engine parts. The company’s stock is currently trading at $40 per share and historically has had a volatility measure (standard deviation) of 30%. The options you are considering buying have a strike (exercise) price of $44 and run for 6 months (180 days). If the risk-free rate currently stands at 9%, and the underlying stock for the Wallace & Fischer Corporation is offering a dividend yield of 1.25%, determine the Black-Scholes-Merton model values for: N (d1), N (d2), N (- d1), and N (- d2). Given the information in question four (4) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) of a call option (Ct) for Wallace & Fischer stock using the Black-Scholes-Merton model. b. How much of the call’s value is composed of intrinsic value? How much of the call’s value is composed of a time premium? (Explain how you determined these values.)

5.

Homework Problems: Options (Fin. 338)

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6.

Given the information in question four (4) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) of a put option (Pt) on Wallace & Fischer stock using the Black-Scholes-Merton model. (Use the put/call parity model to confirm your answer.) b. How much of the put’s value (price) is composed of intrinsic value? How much of the put’s value is composed of a time premium? (Explain how you determined these values.)

7.

A four month (120 day) call option on a certain stock has an exercise (strike) price of $62 and is currently selling for $10. If the corresponding put option for this same stock (with the same $62 strike price and four month expiration length) is selling for $15.40, what is the underlying stock’s current market price? Use the put/call parity model to determine your answer. (Assume the current risk-free rate is 4%, and that the stock pays no dividends.) Assume a 3 month (90 day) call option on Coreman & Steel Corporation (a maker of oil drilling equipment) stock is selling for $1.20. The corresponding put option (with the same strike price and three month expiration length) is selling for $6.70. If Coreman & Steel stock is currently trading at $19.70 per share, and has an annual dividend yield of 2.2%, at what strike price can the stock’s three month put and call options can be exercised? (Assume a risk-free rate of 6.5%.)

8.

Homework Problems: Options (Fin. 338)

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Answers to Homework Problems: Options Markets
(Fin. 338)

1.

N (d1) = 0.7792 (where d1 = 0.7694) N (d2) = 0.7350 (where d2 = 0.6280) N (- d1) = 0.2208 N (- d2) = 0.2650 a. $4.76 (call price) b. a. $0.81 (put price) b. N (d1) = 0.4362 (where d1 = - 0.1605) N (d2) = 0.3547 (where d2 = - 0.3726) N (- d1) = 0.5638 N (- d2) = 0.6453 a. $2.42 (call price) b. a. $4.73 (put price) b. $55.78 $25.50

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Homework Problems: Options (Fin. 338)

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