FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 Homework Assignment 4 Using the Black Scholes Option Pricing Model Answer

FIN 631 – Security Analysis & Portfolio Management
Homework Assignment #4: Special Problems – To Help Practice & Prepare for Midterm and Final Exams

(1)Using the Black Scholes Option Pricing Model, calculate the value of Call and Put Options for a stock with the following information. Use the Power Point presentation along with the Standard Normal Distribution Table given to you from presentation to you on this topic. Show all your work.
Inputs:
Risk free rate = rfr = 0.10 or 10%
Time to maturity (by days in year) = (T) = 50/365
Exercise Price (X) = $40
Standard deviation (σ) = 0.23
Stock Price (S) = $42

Guidelines for Using the Standard Normal Distribution Table and Rounding the Numbers
1) With rounding in this venue, the protocol is to calculate out to four digits. For example, assume you have rounded your calculation so that d1 = 0.3767.
2) Next, you round 0.3767 to 0.38, and the corresponding N(d1) = 0.6480.

Another helpful hint or guideline: One more thing: if you ended up with d1 = 0.3749, PLEASE DO NOT convert that into 0.375 and then round to 0.38. Instead, the d1 would be rounded to 0.37.

This problem and the Standard Normal Distribution Table are both taken from a CFA preparatory text along with the aforementioned guidelines

(2)If a stock sells for $100 per share, its last dividend was $1.50 and its growth rate is 5%, what is the stock’s required rate of return?

(3)Given the following information, calculate the theoretical intrinsic value of the Call option using the Black Scholes Model. IF the market price for the Call option = $11, should the investor buy?

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