1) When would you purchase a call option and when would you buy a put option? In other words, how would you expect the underlying stock price move when you buy a call option and a put option?
2) Wisteria Lane Cleaning System publicized today a $1 per share dividend to be paid year from now and expect dividend to increase by $1 year for another two years. After 3rd year, dividend growth is expected to settle down to steadier rate of= 4%. If needed rate of return of the company is 7%, what should be price of the stock?
Black-Scholes Model
3) Use Black-Scholes model to determine price for call option with given inputs: (i) current stock price is $32, (ii) strike price is $35, (iii) time to expiration is six months, (iv) annualized risk-free rate is 3%, and (v) variance of stock return is 0.26.