Name(s)_____________________________________________________________________________

Homework #5 – 100 Points Total

*Due at the beginning of class on Wednesday, December 5th.
**You may work in groups of up to 4 people; just put all of the names at the top of this page.
Your group should only hand in one homework.
**Please print this HW one-sided and write in the space provided (I will try to leave plenty of
space, but use the back of the page if you need to). Please show all work for full credit!

Question 1 (30 points)

Below is some actual data for call options on Netflix (NFLX) from November 26, 2018. The options
expire on January 18, 2019. NFLX’s most recent closing price was $261.43, and the 2-month treasury
rate (risk free rate) is 2.35% (annualized). There are 36 trading days between November 26 and
expiration (assume 252 trading days in the year).

Fill in the Implied Volatility column below (you can use the spreadsheet I posted on Blackboard, but I’d
encourage you to build your own Black-Scholes-Merton spreadsheet and then use it, it’s a good exercise!)

Strike Price Option Price Implied Volatility

$60.00 $204.00 See Spreadsheet

$90.00 $174.40 See Spreadsheet

$150.00 $115.40 See Spreadsheet

$200.00 $66.05 See Spreadsheet

$250.00 $30.10 See Spreadsheet

$275.00 $17.35 See Spreadsheet

$310.00 $3.80 See Spreadsheet

$350.00 $0.73 See Spreadsheet

$400.00 $0.18 See Spreadsheet

$450.00 $0.09 See Spreadsheet

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist
Comment on your findings on the previous page (remember, this is the actual Netflix option data).

See Spreadsheet for some details on this.

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist
Question 2 (30 points)
Use the Spectrum Brands dataset posted on Blackboard to value a 6-month call option with a $50 strike
price. The current 6-month T-bill rate is 2.54%. For S0, use the most recent price from the spreadsheet.
You will need to calculate the stock’s volatility from the data (slide 16 from the Ch. 15 notes). Find the
value of the option (using the Black-Scholes-Merton model) if you calculate the volatility using the entire
year of data, the last 9 months (meaning the most recent 9 months), the last 6 months, the last 3 months
and the last 1 month of returns to calculate volatility, and put your numbers in the table below.

Data for σ calculation Option Price

Last 12 Months See Spreadsheet

Last 9 Months See Spreadsheet

Last 6 Months See Spreadsheet

Last 3 Months See Spreadsheet

Last 1 Month See Spreadsheet

Comment on your findings, and pick which value you would use if you had to pick one, and why.

See Spreadsheet for some commentary

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist
Question 3 (40 points)
You want to use the binomial tree analysis to value a 2-year American put option with a $80 strike price
on Crabbe and Goyle Corporation. The shares are currently trading for $110. The annualized
continuously compounded risk-free rate is 5%. The volatility of the stock is 64%. You will use the Cox
Ross Rubenstein method for computing the binomial tree (see slide 32 of the Ch. 13 notes for details).
Draw the binomial tree and find the value of the option using a time step of 6 months (n=4).

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page - additional space for question 3 answer)

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist
(Blank page - additional space for question 3 answer)

Homework #5
MGMT 41150 – Futures and Options
Professor Boquist