Compute implied volatilities of both options on both dates

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Reference no: EM132061163

You are given the following information on two European call options written on stock XYZ at a strike of 175.

Maturity 11/16/2018 Maturity 01/17/2020 XYZ price

Price Price

4/11/2018 12.50 20.10 178.10

4/12/2018 9.75 17.50 172.55

Assume an annual rate of interest of 2% and an annual dividend rate of 1%. Both rates are continuously compounded.

a) Compute the implied volatilities of both options on both dates. (You will compute four implied volatilities in total)

b) Create a P&L explanation for these two options. A P&L explanation is an explanation of the change in the option value between the two days. The change in value should be expressed as a function of delta, gamma, vega and time decay.

c) Discuss the main differences between the P&L explanations of the two options.

Reference no: EM132061163

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