BBMF2073 FOREX AND DERIVATIVES

Tutorial 13: Options Pricing

Question 1:

Calculate the fair value of a call option using BSOPM with the following information:

Stock price = RM 40.00

Exercise price = RM 35.00
Interest rate = 12%
Maturity = 180 days
Standard deviation = 30%
Dividends =0

Question 2:

Assume MAS stock price is now RM6.00. If there is a 30 day RM5.00 call option on the stock. a) What
should its price be, if the 3-month KLIBOR is 4% annualized and stock price volatility is 40%.

∂C
=−e−rt ×N ( d 2)
b) Compute the sensitivity to change in exercise price, ∂ K , and explain its
implication.

Question 3:

David has bought the call option of Good View Bhd. at RM3.15 and subsequently sought your advice
whether he has bought it at a fair value.

You managed to obtain some information from your broker’s website which displayed the current
stock price and exercise price is at RM30 and RM29 respectively with a time to maturity of 90 days. It
also indicated a standard deviation of 30%

The risk-free rate of a 10 year-Treasury Bill is 4%.

a) Using the Black-Scholes Option Pricing Model, advise David on the fair value of the call
option of Good View Bhd.

b) Using the Black-Scholes Option Pricing Model, determine the price of the put option of Good
View Bhd.

c) “The Black-Scholes Option Pricing Model (BSOPM) is built on a set of underlying

assumptions”.
Outline FIVE (5) key assumptions of the BSOPM that will have a direct consequence on
options pricing.
 BBMF2073 FOREX AND DERIVATIVES

Question 4:

Matt presented you with the following information which was obtained from a consultant at the
ECBC Banking Corporation booth at the KL Investors Expo Fair recently:

ABC’s current price is RM20 per share. The percentage change in the stock price is 10% with a 50%
probability of either up or down movement.

Assume that the call only changes 1 time in price and the exercise price of the option is RM19

The risk free interest-rate is 5%.

The consultant has advised Matt to invest in ABC option which costs less than RM1.

Determine the value of the call and advise Matt whether it has been fairly valued.

Question 5

A stock with is selling at RM35.50 per share, and its volatility is 10% with 70% upward probability.
However, you would like to know the price of the option for the underlying asset with three months
to expiration and a strike price of RM30. The riskless interest rate is 2%. (Assume that the price
changes 3 times over the period.)

a) Based on the multiperiod binomial option pricing model, estimate the value of a call for the
above option.
b) Estimate the value of the put option above.
c) State and briefly explain two reasons why there is a huge difference between the value of
the call and put.