1)
Consider the information about a stock and its
call options
|
A |
B |
C |
D |
|
|
Months to exercise |
6 |
6 |
6 |
9 |
|
Risk-free rate |
12% |
12% |
12% |
12% |
|
Standard deviation of stock returns |
40% |
40% |
40% |
40% |
|
Current stock price |
$65 |
$65 |
$65 |
$65 |
|
Exercise price |
$60 |
$62 |
$59 |
$59 |
|
Expected cash dividend |
No |
No |
No |
No |
a)
Without calculating the option prices, which
call premium should be higher?
(1)
A versus B
(2)
A versus C
(3)
C versus D
b) Calculate the Black-Scholes
value for call A
c) What should be the value of the
put with terms identical to those of A?
d) Develop an investment strategy
for the following case: The pending contract award by the government may cause
stock A to advance or decline sharply within the next 4 months (hint: 3 answer
– A compare to B, A compare to C, A compare to D)
