Calculate the price of a put option contract, Financial Management

The price of a non-dividend paying share, St, follows a geometric Brownian motion process. The current price of the share is £10 and volatility of the share price process is 12% per annum. The constant continuously compounded risk-free rate of interest is 4% per annum.

(a) Using Black-Scholes formula, show that the price of a European call option contract on the share with strike price £10 and 1 year to maturity is £0.69.

(b) Using put-call parity, or otherwise, calculate the price of a European put option contract on the share with strike price £10 and 1 year to maturity.

(c) Consider a strategy of simultaneously buying a 1-year European call option contract with strike price £10 and a 1-year European put option contract with strike price £10.

(i) Draw and label the consolidated pro t diagram for the strategy.

(ii) Outline the rationale behind the choice of this particular strategy.

Posted Date: 2/20/2013 2:34:47 AM | Location : United States







Related Discussions:- Calculate the price of a put option contract, Assignment Help, Ask Question on Calculate the price of a put option contract, Get Answer, Expert's Help, Calculate the price of a put option contract Discussions

Write discussion on Calculate the price of a put option contract
Your posts are moderated
Related Questions
AGENCY THEORY An agency relationship may be defined as a contract under which one or more people (the principals) hire another person (the agent) to perform some services on th

Public Bourses The origin of this type of bourses can be found in the legislative work of Napoleon. These type of bourses are regulated by the government, brokers are appointed

what are the features of branch accounting

Question 1: Explain clearly why "Public Policy Making constitutes a major part of the work of the Government. Question 2: Consider the role of interest groups in public

Interest rates are the key determinants of business cycles in emerging market countries. In the past, several economies had experienced frequent and great changes

Extent of Financing Required It is clear that sales are unsure with low, high and medium estimates of demand. This of itself gives a few uncertainty but the reliability and pr

What is Capital Budgeting Capital Budgeting is probably the most financial decision for a firm. It relates to selection of an asset or investment proposal or course of action

Q. Evaluate of Risk-Adjusted Discount Rate? Illustration: - From the following date state which project is preferable: Year Project A Proj

a. Consider the time line below that shows periodic cash flows and interest rates per period. Interest rate/year 0 1 2 3 4 5 6 7 8 9 Time 2,500 -4,000 6,000 -3,700 Cash flows

a) Year 2 ROCE = $400k / $1,000k = 40% Year 1 ROCE = $360k / $800k = 45% b) ROCE is an efficiency ratio that measures the monetary performance of a firm compared with the amo