Problem:
A call option is the right to buy stock at $50 a share. Currently the option has six months to expiration, the volatily of the stock (standard deviation) is .30, and the rate of interest is 10 percent
Required:
Question 1: What is the value of the option according to the Black-Scholes model if the price of the stock is $45, $50, or $55?
Question 2: What is the value of the option whne the price of the stock is $50 and the option expires in six months, three months, or one month?
Question 3: What is the value of the option when the price of the stock is $50 and the interest rate is 5 percent, 10 percent, or 15 percent?
Question 4: What is the value of the option when the price of the stck is $50 and the voliaty of the stock is .40, .30, or .10?
Question 5: What generalzation can be derived from the solutions to these problems?
Note: Provide support for your underlying principle.