Requirement 1 To determine: To determine the implied standard deviation of the call at price of $8. Introduction: Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date. Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

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Answer 1

Question

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

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You are pricing options with the following characteristics: •Current stock price (St): $35.60 •Exercise price (X): $50 •Time to expiration (T-t): 9 months •Risk-free rate (rf): 3.25% •Volatility (0): 45% (a): What is the Black-Scholes value of call option? In your hand-written solution, provide the calculations of d1,d2, and the final call price. Use Excel or another spreadsheet program to compute the values of N(d1) and N(d2). See the notes for details. (b): Using put-call parity, what is the value of a put option? For this case, assume continuous compounding, which implies that PVt(X)=e-r(T-t).X.

Answer 2

Question

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

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Answer 3

Question

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

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Answer 4

Question

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

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Answer 5

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

Answer 6

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Answer 7

Chapter 21, Problem 28PS

Summary Introduction

Requirement 1

To determine:

To determine the implied standard deviation of the call at price of $8.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Answer 8

Expert Solution

Answer to Problem 28PS

The Standard deviation is 0.3213

Answer 9

Expert Solution

Answer 10

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $8.

Performing the what-if analysis by setting the call option value to $8, and changing the standard deviation accordingly, we get the following data:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock Price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

The Standard deviation for call price of $8 is 0.3213

Answer 13

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Answer 14

Summary Introduction

Requirement 2

To determine:

To determine the impact on the volatility when the option sells at $9

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Answer 15

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the option sells at $9

Answer 16

Expert Solution

Answer 17

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

Value of call option is $9.

Using the spreadsheet and setting the value to $9, we get

INPUTS		OUTPUTS
Standard deviation (annual)	0.3568	d1	0.0318
Expiration (in years)	0.5	d2	-0.2204
Risk-free rate (annual)	0.05	N(d1)	0.5127
Stock Price	100	N(d2)	0.4128
Exercise price	105	B/S call value	9.0000
Dividend yield (annual)	0	B/S put value	11.4075

This shows an increase in the standard deviation which is now 0.3568

With increase in the value of the option, the volatility increases. So there is an increase in the implied volatility

Answer 20

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Answer 21

Summary Introduction

Requirement 3

To determine:

To determine the effect on implied volatility when the option price is $8 but expiration time is only four months

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Answer 22

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the expiration time is reduced while keeping the option price same.

Answer 23

Expert Solution

Answer 24

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the expiration time is set to 4 months, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.4087	d1	-0.0182
Expiration (in years)	0.33333	d2	-0.2541
Risk-free rate (annual)	0.05	N(d1)	0.4927
Stock Price	100	N(d2)	0.3997
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	11.2645

This shows that implied volatility rises to 0.4087 when the option price is kept at $8 and maturity time is lowered to 4 months.

With shorter maturity, the value of the option generally decreases. To keep the value of the option the same, then the implied volatility has to increase in this scenario.

Answer 27

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Answer 28

Summary Introduction

Requirement 4

To determine:

To determine the effect on implied volatility when the option price is $8 but exercise price is lowered to $100.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Answer 29

Expert Solution

Answer to Problem 28PS

Implied volatility decreases.

Answer 30

Expert Solution

Answer 31

Expert Solution

Answer 32

Expert Solution

Answer 33

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the exercise price is lowered to $100, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.2406	d1	0.2320
Expiration (in years)	0.5	d2	0.0619
Risk-free rate (annual)	0.05	N(d1)	0.5917
Stock Price	100	N(d2)	0.5247
Exercise price	100	B/S call value	8.0010
Dividend yield (annual)	0	B/S put value	5.5320

This shows that implied volatility reduces to 0.2406 when the option price is kept at $8 and exercise price is lowered to $100.

With lower exercise price, the value of call increases. But here to keep the value of the option the same, then the implied volatility has to decrease in this scenario.

Answer 34

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.

Answer 35

Summary Introduction

Requirement 5

To determine:

To determine the effect on implied volatility when the option price is $8 but stock price is lowered to $98.

Introduction:

Put option is the option which provides the option holder with the right to sell the assets or to exercise the contract but it does not give any obligation. The put option is exercised at a price which is specific or predetermined price before or on the expiration date.

Call option is the option which provides the right to the option holder to purchase the assets or right to exercise the contract. However it does not give the obligation. This option is exercised at a specific or predetermined price on the expiration date or before it.

Answer 36

Expert Solution

Answer to Problem 28PS

Implied volatility increases when the stock price is decreased.

Answer 37

Expert Solution

Answer 38

Expert Solution

Answer 39

Expert Solution

Answer 40

Explanation of Solution

Given Information:

The spreadsheet containing the data is available in the given website.

Underlying stock sells for $100 a share and no dividend is paid. 5% is Risk free rate.

When the stock price is lowered to $98, while option price is at $8, the values are as below:

INPUTS		OUTPUTS
Standard deviation (annual)	0.3566	d1	-0.0484
Expiration (in years)	0.5	d2	-0.3006
Risk-free rate (annual)	0.05	N(d1)	0.4807
Stock Price	98	N(d2)	0.3819
Exercise price	105	B/S call value	8.0001
Dividend yield (annual)	0	B/S put value	12.4077

This shows that implied volatility increases to 0.35666 when the option price is kept at $8 and stock price is lowered to $98.

With lower stock price, the value of call decreases. But here to keep the value of the option the same, then the implied volatility has to increase in this scenario.