risk-free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to calculate the value of this call.

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
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A stock has a current price of $67. An option on this stock that expires in six months has an exercise price of $65. The
stock will pay a dividend of $5 in three months. Assume an annualized volatility of 30% and a continuously compounded
risk - free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a
European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to
calculate the value of this call.
Transcribed Image Text:A stock has a current price of $67. An option on this stock that expires in six months has an exercise price of $65. The stock will pay a dividend of $5 in three months. Assume an annualized volatility of 30% and a continuously compounded risk - free rate of 5% per annum. Use the Black - Sholes - Merton model to price this option. 1) Suppose the option is a European put. Calculate the value of the put. 2) Suppose this option is an American call. Use Black's approximation to calculate the value of this call.
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