Reference no: EM133119224
Black-Scholes and its Extensions
(a) Suppose a stock is trading at $1,000, and is expected to pay a $20 dollar dividend in one month. The stock has a volatility of 40%, and oneand three-month T-bills are trading at $99 and $98.02, respectively.
i. What inputs (S, K, T, r, and σ) would you use in the BlackScholes formula to get the price of a three-month at-the-money European call on the stock?
Note: you do not need to calculate the explicit dollar price-just give the five inputs to B-S. 3
ii. What is the risk-neutral probability of exercising the call at maturity?
Please provide an explicit numeric answer.
iii. If ESCO suddenly announces that it will cut its dividend in one month by $2, what is the approximate change in the value of your call?
Please give me an answer in dollars.
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