# Quiz 13: Real-Options Analysis

A call option gives its owner the right, but not the compulsion, to buy a fixed number of shares at the strike price on the maturity date. Given Stock price = $120, Strike price = $150, risk free interest rate =6 %, volatility = 45% and Time =0.5 years and it is required to find out the price of a European call option. The Black-Scholes formula for the price of the call is Where, Substitute the values in the above formula and can be seen as follows: Now, after getting the values of , it is required to get the normal distributive value from the appendix C of the book and the values will be, The call option value will be calculated as done below: The price for the call will be

A call option gives its owner the right, but not the compulsion, to buy a fixed number of shares at the strike price on the maturity date. Given the value of project to be $100 million and rate of interest of 6%. (a) It is needed to calculate the underlying asset lattice which can be calculated with the appropriate formula in the excel as seen below: The corresponding values are: Hence, it can be seen that the value of the project changes over time. It can be better understood by the diagram given below: (b) The option value can be better calculated from the diagram given below: Hence, the option value is .

A put option is a security or collateral that you buy when you consider the price of a stock is going to go down. It is the right to sell the shares of a stock at a specified price and that "specified price" is recognized as the strike price. Given Stock price = $68.50, Strike price = $70, risk free interest rate =5 %, volatility = 60% and Time =0.16 years and it is required to find out the price of a European put option. The Black-Scholes formula for the put option is Where, Substitute the values in the above formula and can be seen as follows: Now, after getting the values of , it is required to get the normal distributive value from the appendix C of the book and the values will be, The put option value will be calculated as done below: The price for the call will be .

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