Question 1 • Springtime Insurance Brokers Ltd. (SIBL) stock is currently selling for $42. A put option on the stock with a value of $3 has an exercise price of $40 and 6 months until expiration. To prevent arbitrage opportunities, what should be the value of a call option with the same strike price and expiration date? Assume that the options are European and that the effective annual risk-free rate is 6%.

Question 1 • Springtime Insurance Brokers Ltd. (SIBL) stock is currently selling for $42. A put option on the stock with a value of $3 has an exercise price of $40 and 6 months until expiration. To prevent arbitrage opportunities, what should be the value of a call option with the same strike price and expiration date? Assume that the options are European and that the effective annual risk-free rate is 6%.

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter18: Derivatives And Risk Management

Section18.A: Valuation Of Put Options

Problem 2P

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Question 5 Consider an option on a non-dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. a. What is the price of the option if it is a European call? b. What is the price of the option if it is a European put? c. Verify that put-call parity holds. ●
Question 2 (a) Use the Black-Scholes formula to find the current price of a European call option on a stock paying no income with strike 60 and maturity 18 months from now. Assume the 20%, and the constant current stock price is 50, the lognormal volatility of the stock is a = continuously compounded interest rate is r 10% (b) Repeat part (a) for a European put with strike 60 and maturity 18 months from now
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