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Category > Computer Science Posted 28 Jul 2017 My Price 11.00

European call option


A European call option gives a person the right to buy a particular stock at a given price (the strike price) on a specific date in the future (the expiration date). This type of call option is typically sold at the NPV of the expected value of the option on its expiration date. Suppose you own a call option with a strike price of $54. If the stock is worth $59 on the expiration date, you would exercise your option and buy the stock, making a $5 profit. On the other hand, if the stock is worth $47 on the expiration date, you would not exercise your option, and you would make $0 profit. Researchers have suggested the following model for simulating the movement of stock prices:

 

Suppose a stock has an initial price (P0) of $80, an expected annual growth rate (v) of 15%, and a standard deviation (σ) of 25%.

a. Create a spreadsheet model to simulate this stock’s price behavior for the next 13 weeks (note t 1/52 because the time period is weekly).

b. Suppose you are interested in purchasing a call option with a strike price of $75 and an expiration date at week 13. On average, how much profit would you earn with this option?

c. Assume a risk-free discount rate is 6%. How much should you be willing to pay for this option today?

d. If you purchase the option, what is the probability that you will make a profit?

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Maurice Tutor
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Status NEW Posted 28 Jul 2017 12:07 AM My Price 11.00

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