Explore BrainMass

Explore BrainMass

    Black-Scholes Formula for European Stocks

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Given that Stock S and a European Call Option on Stock S
    The current market price of stock S is $20. (So = $20)
    This option of stock S has Exercise Price x=$21 and Expiration Date is after 1 year (t=1)
    The Risk free rate is 3%(Rf=3%). this rate is based on continuously compounding.

    Suppose the market price of this option is $0.63 (C=$0.63). Draw the Profit-Loss Graphs for buying and selling this option and mark X and C in the 2 graphs.

    Buying this European Call Option Graph Selling this European Call Option Graph

    Question 2. Use bionomial Method to calculate the fair price of this option.
    Suppose after one year, the terminal stock price St will be either $22 or $18.

    Question 3. Use Black-Scholes Formula to calculate the fair price of this option.
    Suppose theta equals to 10% (t=10%).

    © BrainMass Inc. brainmass.com March 4, 2021, 7:12 pm ad1c9bdddf
    https://brainmass.com/economics/finance/black-scholes-formula-european-stocks-87501

    Solution Summary

    Black-Scholes Formula is applied in the solution.

    $2.49

    ADVERTISEMENT