The following information is given about an Option on a stock: S(0)=$31, X-$34, rf-9%, variance (sigma squared)=20%, T=182.5 days, Dividend $1.75 in 45 days (1) Calculate the price of a European put option using the Black-Scholes pricing model (show all workings including d1, d2, N(d1), N(d2)) (2) Calculate the price of the corresponding European call option (hint: put call parity) (3) Suppose you feel that the put option is overpriced. What strategy should you use to exploit the apparent mispricing?

The following information is given about an Option on a stock: S(0)=$31, X-$34, rf-9%, variance (sigma squared)=20%, T=182.5 days, Dividend $1.75 in 45 days (1) Calculate the price of a European put option using the Black-Scholes pricing model (show all workings including d1, d2, N(d1), N(d2)) (2) Calculate the price of the corresponding European call option (hint: put call parity) (3) Suppose you feel that the put option is overpriced. What strategy should you use to exploit the apparent mispricing?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter8: Financial Options And Applications In Corporate Finance

Section: Chapter Questions

Problem 5MC: In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1)...

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