Consider a 6 month American call strike at $40 on a stock that pays two 50 cents dividends, going ex-div in 2 months’ and in 5 months’ time. The continuously compounded risk free rate is 9% pa.
(a) Should the option be exercised just prior to the 1st ex-div date? What about the 2nd ex-div date?
(b) How would your answer to (a) change if the strike price is $18? Is it necessary to check the inequality on both ex-div dates? Why or why not?
American option: The owner of such option can exercise his right
at any time on or
before the expiry date/day of the contract.
Option, which gives buyer a right to buy the underlying asset, is called Call option.
a) Yes! the option be exercised just prior to the 1st ex-div date, 2nd ex-div date will miss out the 50 cent dividend because cit is a six month contract.
b) Answer would same as above if the strike price is $18. it is necessary to check the inequality on both ex-div dates based on the time value of option contract more is the time to expire more is the chance of option to achieve in the money.
Consider a 6 month American call strike at $40 on a stock that pays two 50...
Consider a 6 month American call strike at $40 on a stock that pays two 50 cents dividends, going ex-div in 2 months’ and in 5 months’ time. The continuously compounded risk free rate is 9% pa. (a) Should the option be exercised just prior to the 1st ex-div date? What about the 2nd ex-div date? (b) How would your answer to (a) change if the strike price is $18? Is it necessary to check the inequality on both ex-div...
5. Consider a European call option on the stock of XYZ, with a strike price of $25 and two months to expiration. The stock pays continuous dividends at the annual yield rate of 5%. The annual continuously compounded risk free interst rate is 11%. The stock currently trades for $23 per share. Suppose that in two months, the stock will trade for either S18 per share or $29 per share. Use the one-period binomial option pricing model to find today's...
The current price of YBM stock S is $101. American options with a strike price K = $100 and maturing in T = 6 months trade on YBM. The continuously compounded, risk-free interest rate r is 5 percent per year. If the American put price pA is $2.70, then the American call price cA will at maximum be:
The price of a stock, which pays no dividends, is $30 and the strike price of a one year European call option on the stock is $25. The risk-free rate is 4% and is continuously compounded. Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? $5.98 $3.98 $6.98 $4.98
The current price of stock XYZ is $100. Stock pays dividends at the continuously compounded yield rate of 4%. The continuously compounded risk-free rate is 5% annually. In one year, the stock price may be 115 or 90. The expected continuously compounded rate of return on the stock is 10%. Consider a 105-strike 1-year European call option. Find the continuously compounded expected rate of discount γ for the call option.
(i) The current stock price is 100. The call option premium with a strike price 100 is 8. The effective risk-free interest rate is 2%. The stock pays no dividend. What is the price of a put option with strike price 100? (Both options mature in 3 months.) (ii) The 3-month forward price is 50. The put option premium with a strike price 52 is 3 and the put option matures in 3 months. The risk-free interest rate is 4%...
25. The price of a stock with no dividends, is $35 and the strike price of a 1year European call option on the stock is $30. The risk-free rate is 4% (continuously compounded). Compute the lower bound for the call option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Please show your work. 26. A stock price with no dividends is $50 and...
1. Consider the following information about a European call option on stock ABC: . The strike price is S100 The current stock price is $110 The time to expiration is one year The annual continuously-compounded risk-free rate is 5% ·The continuous dividend yield is 3.5% Volatility is 30% . The length of period is 4 months. Find the risk-neutral probability p*. Hint: 45.68%
The 3-month forward price is 50. The put option premium with a strike price 52 is 3 and the put option matures in 3 months. The risk-free interest rate is 4% p.a., compounded quarterly. The stock pays no dividend. What is the price of a call option with a strike of 52 and matures in 3 months?
Consider a stock with a price with S = 100 and pays no dividends. The annual risk-free is 10%. A European put option on the stock with a strike price 90 and an expiration date three months from now has a price of 10. What is the price of a European call option on this stock with the same strike price and expiration date?