FINA 4040

Assignment #11
Due: Monday, December 6th, 12pm on Canvas
Answer the following questions, showing your work. I am not responsible for misinterpretation
of answers or inability to follow your work. You may complete the assignment by yourself or in
a group of up to three people. You only need to submit one assignment per team, but please
make sure that all team members are listed on the assignment. Your submission must be typed.

1. You are tasked with determining the value of European call and put options on Amazon
stock. You are looking at options that expire in exactly 1 year. Look up the current price
of Amazon stock. The strike price for the call and put options is $3500. Look up the
yield on one-year Treasuries as the risk-free rate and treat this as continuously
compounded. You can look up the yield here: https://www.cnbc.com/quotes/US1Y.
Also, compute the standard deviation of daily returns for Amazon over the last 6 months
of trading (i.e. compute the daily returns and then determine the standard deviation of
these daily returns). You can look up historical prices here:
https://finance.yahoo.com/quote/AMZN/history?p=AMZN (you can download the price
data using the “download” link at the top right of the historical price data. Compute daily
P t−P t−1
returns using r t = ¿. Multiply the standard deviation of Amazon’s daily returns
P t−1
(use the Excel function =stdev on the 6 months of daily returns) by √ 252 to get the
annualized standard deviation of returns for Amazon stock. Use this information to
compute the BSM price for both European call and put options on Amazon stock
(remember, N(X) in Excel is =norm.s.dist(X,true).) Amazon historically has not paid
dividends, and assume that they will not pay dividends in the next year.

For this question, submit an Excel worksheet with all of your calculations (including the
price, return, and standard deviation of returns calculations for AMZN stock.) Be sure to
organize your work in a manner that makes it easy to follow your work.

2. Same question, but now assume that Amazon will pay a $100 dividend per share in
exactly ½ year. This is the only dividend that Amazon will pay in the next year.
Compute the BSM European call and put option prices. Use the risk-free rate from above
to compute the PV of the dividend as of today.

Submit an Excel worksheet with your answer to this question as well.