The stock price five months from the expiration of an option is $42, the exercise price of the option is $40, the continuously compounded risk-free interest rate is 11% per annum, and the volatility (o) is 21% per annum. Calculate the price of the option if it is a European call. Calculate the price of the option if it is a European put. a. b.

The stock price five months from the expiration of an option is $42, the exercise price of the option is $40, the continuously compounded risk-free interest rate is 11% per annum, and the volatility (o) is 21% per annum. Calculate the price of the option if it is a European call. Calculate the price of the option if it is a European put. a. b.

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

The stock price five months from the expiration of an option is $42, the
exercise price of the option is $40, the continuously compounded risk-free
interest rate is 11% per annum, and the volatility (o) is 21% per annum.
Calculate the price of the option if it is a European call.
Calculate the price of the option if it is a European put.
1.
а.
b.

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