Quiz 13: Real-Options Analysis

Business

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

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: img The corresponding values are: img Hence, it can be seen that the value of the project changes over time. It can be better understood by the diagram given below: img (b) The option value can be better calculated from the diagram given below: img Hence, the option value is img .

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 img = $68.50, Strike price img = $70, risk free interest rate img =5 %, volatility img = 60% and Time img =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 img Where, img img Substitute the values in the above formula and can be seen as follows: img img Now, after getting the values of img , it is required to get the normal distributive value from the appendix C of the book and the values will be, img The put option value will be calculated as done below: img The price for the call will be img .

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