FINANCIAL MANAGEMENT 2

ASSIGNMENT

PUT-CALL PARITY

1. The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike
price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and
expiration date as for the call option?

2. The common stock of the TAMAD Corporation has been trading in a narrow price range for the past
month, and you are convinced it is going to break far out of that range in the next three months. You do
not know whether it will go up or down, however. The current price of the stock is $100 per share, and
the price of a three-month call option at an exercise price of $100 is $10.
(a) If the risk-free interest rate is 10% per year, what must be the price of a 3-month put option on
TAMAD stock at an exercise price of $100? The stock pays no dividend.
(b) What would be a simple options strategy to exploit your conviction about the stock price’s future
movements? How far would it have to move in either direction for you to make a profit on your initial
investment?

BLACK-SCHOLES
3. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc.
based on the following data:

 The price of the stock is $40.

 The strike price of the option is $40.
 The option matures in 3 months (t = 0.25).
 The standard deviation of the stock’s returns is 0.40, and the variance is 0.16.
 The risk-free rate is 6%.
Using the Black-Scholes model, what is the value of the call option?

4. Juan Dela Cruz is the CEO of San Miguel Trading Company. The board of directors has just granted
Mr. Dela Cruz 20,000 at-the-money European call options on the company’s stock., which is currently
trading at $50 per share. The stock pays no dividends. The options will expire in 4 years, and the standard
deviation of the returns on the stock is 55%. Treasury bills that mature in 4 years currently yield a
continuously compounded interest rate of 6%.
a. Use the Black-Scholes model to calculate the value of the stock options
b. You are Mr. Dela Cruz’s financial advisor. He must choose between the previously mentioned
stock option package and an immediate $450,000 bonus. If he is risk-neutral, which would you
recommend?
c. How would your answer to (b) change if Mr. Dela Cruz were risk-averse and he could not sell the
options prior to expiration?