i) Stock ABC will pay an annual dividend yield (q) of 5%. The strike price of the European call is $20, volatility is 20%, stock price is $30 and yearly rfree =4%. The stock will pay dividends before the option expires. T=1. The following formulae are given: d1=ln[S/PV(X)]/(?T1/2)+[(?T1/2)/2] and d2=d1-?T1/2
(since it pays dividends S should be adjusted)
Use black Scholes
ii) The current price of ABC stock is $25. Next year, this stock price will either go up 20% or go down by 20%. The stock pays no dividends. The one year risk free rate is 6% and will remain constant. The face value of the bond is $1. Using the binomial model calculate the price of a TWO PERIOD CALL option on ABC with a strike price of $25.