# Calculating Option (Call and Put) Values

T-bills currently yield 5.7 percent. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $49 per share in one year. (Round answers to 2 decimal places. If the answer is zero, input as "0".)

a. The value of a call option with an exercise price of $42 is $________. The intrinsic value is $14.

b. The value of a call option with an exercise price of $30 is $_________ . The intrinsic value is $26.

c. The value of a put option with an exercise price of $42 is $_________. The intrinsic value is $0.

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#### Solution Preview

T-bills currently yield 5.7 percent. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $49 per share in one year. (Round answers to 2 decimal places. If the answer is zero, input as "0".)

a. The value of a call option with an exercise price of $42 is $________. The intrinsic value is $14.

A person can buy the call and short the stock.

Amount received on shorting the stock= $56

If this amount is invested at the risk free rate of 5.70%

Amount at the end of 1 year= $59.28 =56 x exp ( 5.7% )

Since there is no possibility that the stock will be worth less than $49 per share in one year, ie the share price at the end of ...

#### Solution Summary

The value of call an put options are calculated for different exercise prices.

Call Options: Calculate Black-Scholes value, European style option, dividend policy

A share of ARB stock sells for $75 and has a standard deviation of return equal to 20% per year. The current risk-free rate is 9% and the stock pays two dividends: 1) A $2 dividend just prior to the option's expiration day, which is 91 days from now (one quarter of a year) and 2) a $2 dividend 182 days from now.

A) Calculate the Black-Scholes value for a European-style call option with an exercise price of $70 (3 point).

B) Calculate the price of a 91-day European-style put option on ARB stock having the same exercise price.

C) How would a change in dividend policy impact the call option's value?

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