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The Chicago Board Options Exchange website shows that there is a call option on Microsoft stock. The option has a strike price of $35. At the same time, a US Treasury Bill with the same maturity date has an annualized return of 1.25%. You may assume that the correct standard deviation to use in the Black-Scholes formula is 36.5% annually. For simplicity, you can assume that there are exactly 7 months (or 210 days) to the maturity of the option.
a) Calculate the price of the call option described above assuming that the option has a European exercise structure. The price of the Microsoft stock is $27 at the time the option was quoted.
b) Suppose that you believe the historical annual standard deviation of Microsoft stock, 34.5%, should be used as the volatility variable in the formula when calculating the Black-Scholes price. What will be the price of the same option under this new volatility measure?
c) Calculate the price of a put option that has the same strike price and maturity as the above call option. Use the historical volatility in your calculation.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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