Question

Calculate the price of a 6-month index call option with 1000 strike price using the following...

Calculate the price of a 6-month index call option with 1000 strike price using the following information.

Current index level 1,083
Index dividend yield 1% per annum
Risk-free rate 4% per annum
6-m index put option price w/ 1000 K $34.94

Round the the nearest 2 decimal points. For example, if your answer is $123.456, then enter "123.46"

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Price of six - month index call option:

Given:

Current index level = 1083

Exercise price = 1000

Index dividend yield = 1% per annum

Risk free rate = 4% per annum

Now we can calculate the fair future price of call option by continuous compounding method. The formula is as under:

Fair future price = Current market price x (1 + r)n

Since dividend yield is 1% per annum, yield for six months will be 0.5%

Risk free rate is 4% per annum, hence risk free rate for 6 months = 2%

Current market price = 1083 x 1.005

Current market price = 1088.42

Now putting the values into formula, we have:

Fair future price = 1088.42 x (1 + 0.02)

Fair future price = 1110.19

Hence, fair future price for six months is 1110.19.

Add a comment
Know the answer?
Add Answer to:
Calculate the price of a 6-month index call option with 1000 strike price using the following...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT