Question

Recalculate the value of the option in Problem 16 , successively substituting one of thechanges below while keeping the other parameters as in Problem 16 :

a. Time to expiration = 3 months

b. Standard deviation = 25% per year

c. Exercise price = \(55

d. Stock price = \)55

e. Interest rate = 5%

Consider each scenario independently. Confirm that the option value changes in accordancewith the prediction of Table 16.1.

Question: Use the Black-Scholes formula to find the value of a call option on the following stock:

Time to expiration = 6 months

Standard deviation = 50% per year

Exercise price = \(50

Stock price = \)50

Interest rate = 3%

Short answer

As below

Step-by-step solution

Given information’

S_o= $55

X = $55

r = 5%

σ= 25%

T = 3 months = 0.25

Calculation of the Black Scholes value using spreadsheet for changed input

S.n.	Change in input	Output
a.	Change input for Time to expiration to .25 years	C = $5.14
b.	Change standard deviation to 25% per year	C = $3.88
c.	Change exercise price to $55	C = $5.40
d.	Change Stock price to $55	C = $10.54
e.	Change interest rate to 5%	C = $7.56