1. A non-dividend paying stock sells for $23 3/8. What is the theoretical value of a European style, $25 call with 50 days until expiration, assuming interest rates of 6% and annual volatility of 25%?
2. Estimate the value of the option in Problem 1 if it were American style instead of European.
3. You are going to use the Black-Scholes option pricing model on a six-month call option that has the following expected dividend stream; short term interest rates are 5%.
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Time until dividend
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2 months
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5 months
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8 months
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Expected dividend
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$1.00
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$1.00
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$1.05
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If the current stock price is $105, what is the adjusted stock price you would use as a BSOPM input?