Q4 (Exercise 12.3) Let S = $100, K = $120, σ = 30%, r = 0.08, and 8 = 0. a. Compute the Black-Scholes call price for 1 year to maturity and for a variety of very long times to maturity (use T=1, 2, 5, 10, 50, 100, 500). What happens to the option price as T→ ∞o? b. Set 8 = 0.001. Repeat (a). Now what happens to the option price? What accounts for the difference?
Q4 (Exercise 12.3) Let S = $100, K = $120, σ = 30%, r = 0.08, and 8 = 0. a. Compute the Black-Scholes call price for 1 year to maturity and for a variety of very long times to maturity (use T=1, 2, 5, 10, 50, 100, 500). What happens to the option price as T→ ∞o? b. Set 8 = 0.001. Repeat (a). Now what happens to the option price? What accounts for the difference?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Q4 (Exercise 12.3) Let S = $100, K = $120, σ = 30%, r = 0.08, and 8 = 0.
a. Compute the Black-Scholes call price for 1 year to maturity and for a variety of very long times to maturity (use T=1, 2, 5, 10, 50, 100, 500). What happens to the option price as T → ∞o?
b. Set 8 = 0.001. Repeat (a). Now what happens to the option price? What accounts for the difference?
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