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Calculate black-scholes value of the option

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You are expecting XYZ stock price to go down in next 3 months, however you are not completely sure. So you decide to use just one option, either European call or European put on XYZ stock maturing in 3 months to bet on your view about XYZ's stock price prospects. Suppose that the current stock price is $125 and the strike price for both call and put on the XYZ stock is $110.

(a) Describe your position in one option XYZ stock? Explain.

(b) Calculate Black-Scholes value of the option you have identified in part a? The risk free rate is 5% per annum with continuous compounding. Assume that the standard deviation of XYZ's stock return is 20% per year.

Reference no: EM133113623

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