A trader is asked to value a 1-year European call option for Facebook Ltd. common stock, which last traded at 43 USD. He has collected the following information: call and put option exercise price 45 USD, 1-year put option price 4 USD, 1-year Treasury bill rate 5.50% continuously compounded. Calculate the European call option value using put-call parity. (c) State the effect, if any, of each of the following three variables on the value of a call option. (No calculations required.) i. An increase in the short-term interest rate. ii. An increase in stock price volatility. iii. A decrease in time to option expiration. (d) Price the call having strike 60 GBP. Use the two-periods binomial model with u=1.1 and d=0.9. Assume that the risk free rate is 5%, and the current price of the underlying asset is 50 GBP.
(b) A trader is asked to value a 1-year European call option for Facebook Ltd.
common stock, which last traded at 43 USD. He has collected the following
information: call and put option exercise price 45 USD, 1-year put option price
4 USD, 1-year Treasury bill rate 5.50% continuously compounded. Calculate
the European call option value using put-call parity.
(c) State the effect, if any, of each of the following three variables on the value
of a call option. (No calculations required.) i. An increase in the short-term
interest rate. ii. An increase in stock price volatility. iii. A decrease in time to
option expiration.
(d) Price the call having strike 60 GBP. Use the two-periods binomial model with
u=1.1 and d=0.9. Assume that the risk free rate is 5%, and the current price
of the underlying asset is 50 GBP.
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