A wealthy investor owns a collection of vintage James Bond movie posters currently valued at $1.6 million.
This value has fluctuated over the years due to uncertainty about who will replace Daniel Craig in future movies, how will the Bond franchise will be impacted by the resurgence of Star Wars as a competitor, and the general state of economic growth.
The standard deviation posters has increased to 24%. This wealthy investor is hoping to hedge this price uncertainty over the next one year. The risk free rate of interest is 5.7%. The investor has a friend who says she might be interested in buying the collection for $1.5 million during the next year.
A. Explain how this scenario resembles a call option on a share of stock.
B. Compute the price of this call option using BSM.
C. Compare this value to the value one would compute using the Binomial option pricing model. This is NOT a math question, am asking you to tell me the differences between the two models and why they would derive two different answers.
D. Describe how changes in standard deviation, the risk free rate, and the market value of the collection would impact the call option price.