d1 = [ln(P0/X) + (r+vσ2/2)t]/σ√t and d2 = d1 – σ√t

P0= Price of the underlying security

X= Strike price

N= standard normal cumulative distribution function

r = risk-free rate

v= volatility

t= time until expiry

Put- Call Parity

X
So + Po −C o =
( 1+ R F )T
−R F
Or Xe T
 X
C o −Po =S−
Or ( 1+ R F ) T

Questions

1. Stock XYZ is trading for $60. The strike price is $60. Volatility is
10%, and the risk-free rate is 5%.Calculate the value of a 1-year
call and put options written on it using the BSM model.
2. The price of a European call that expires in 6 months and has a
strike price of $30 is $2. The underlying stock price is 29, and a
dividend of $0.5 is expected in two months time and again in 5
months. The term structure is flat, with all risk free interest
rates being 10%. What is the price of the European put option
that expires in 6 months and has a strike price of $30.
3. What are the six factors that affect option price?
4. There is a European call option that gives the holder the right
to buy 100 shares of company XYZ at $100 in 3 months’ time.
What is the value of this call option if the spot price at
expiration is $110.15?
5. Option has a strike price of $55 and expires 65 days from today.
The return on a 65-day T-bill is 3.5% per year compounded
continuously. Gurgle’s current stock price is $58 per share and
the standard deviation of returns on Gurgle is 46%. What is the
value of this put option?. (Note: The call on Gurgle Baby Food is
worth $6.14)