1. You are considering buying options on the stock of the Wallace & Fischer Corporation, a producer of jet aircraft engine parts. The company’s stock is currently trading at $40 per share and historically has had a volatility measure (standard deviation) of 30%. The options you are considering buying have a strike (exercise) price of $44 and run for 6 months (180 days). If the risk-free rate currently stands at 9%, and the underlying stock for the Wallace & Fischer Corporation is offering a dividend yield of 1.25%, determine the Black-Scholes-Merton model values for: N (d1), N (d2), N (- d1), and N (- d2).
2. Given the information in question four (4) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) of a call option (Ct) for Wallace & Fischer stock using the Black-Scholes-Merton model. b. How much of the call’s value is composed of intrinsic value? How much of the call’s value is composed of a time premium? (Explain how you determined these values.)
3. Given the information in question four (4) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) of a put option (Pt) on Wallace & Fischer stock using the Black-Scholes-Merton model. (Use the put/call parity model to confirm your answer.) b. How much of the put’s value (price) is composed of intrinsic value? How much of the put’s value is composed of a time premium? (Explain how you determined these values.)