Determine continuously compounded interest rate suitable

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Reference no: EM131009929

In the following we consider July vanilla option for stock: Microsoft, MSFT. (a) Use appropriate current Treasury bill data to determine a continuously compounded interest rate suitable to price July 2016 options. Notes: You can use “ U.S. Department of Treasury’s website / Resource Center “ as your sources and use 52-Week T-bill discount rate. Please show your computations for continuously compounded interest rate. (b) Find the historical volatilities σˆ of the stock estimated from all closing prices of the stock for the last 12 months. Note: You can use “Yahoo finance” as your sources of data and document your procedure. (c) Using a two-period Binomial model with the observed historical volatilities and the observed interest rate of the T-bill, find the price of the European call options on Microsoft stock with strike price of $50 and assume no dividend.

Reference no: EM131009929

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