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Determine the price today of the forward start option

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Reference no: EM132510037

The price of oil is K100 per barrel. Oil prices are expected to grow at 4% per year. The one-year risk-free rate of interest is 2% in simple terms. It costs K1 to store a barrel of oil for one year. If oil has no costs or benefits of carry, what is the theoretical one-year forward price of oil?

A non-interest-bearing asset has a spot price of K100. It costs 1% per annum (on a simple rate basis) to store the asset. Simple interest rates are 5% per annum. What is the fair one-year forward price?C. Consider a forward start option which, 1 year from today, will give its owner a 1-year European call option with a strike price equal to the stock price at that time. You are given:

(i) The European call option is on a stock that pays no dividends.

(ii) The stock's volatility is 30%.

(iii) The forward price for delivery of 1 share of the stock 1 year from today is 100.

(iv) The continuously compounded risk-free interest rate is 8%.

Required: Under the Black-Scholes framework, determine the price today of the forward start option.

Reference no: EM132510037

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