Do you have the same implied volatility for the two options

Reference no: EM13617908

Answer the following questions given the following call option prices on Google (GOOG) and on Apple (APPL). Note that these are actual option prices on 2/21/13 and these contracts have 60 days till expiration. The 2-month T-bill rate is about 4.75%. Attach all work with your report.

OPTION	STRIKE	EXP	VOL	LAST
GOOG	800	Apr	378	28.20
S=795.53	690	Apr	53	101.57
APPL	450	Apr	530	18.55
S=446.06	480	Apr	856	7.81

Part One

1. Estimate the theoretical option values for the call on GOOG with K =800 and for the call on APPL with K = 450 using the Black-Scholes-Merton and Binomial Models program (available under doc sharing). You can also use the following website to calculate the option prices and implied volatility www.option-price.com

2. When estimating the option values assume various standard deviations of returns of 10%, 15%, 20%, ... up to 100% or until you find the theoretical option value is close to the actual one.

3. Draw a graph showing the relationship between standard deviations and option values.

4. Based on the graph, what does the actual option value imply about the expected future standard deviation (volatility)? Which option has higher implied volatility and is it surprising?

Part Two

1. Estimate the historical standard deviation of GOOG*.

2. Compare the implied standard deviation with the historical standard deviation.

3. What can you infer from the difference, if any, between the two numbers?

Part three

1. Compute the implied volatility for all options.

2. Do you have the same implied volatility for the two options on the same underlying? If not (in which case it is referred to as volatility smile), what might be able to explain the differences? (Hint: refer to the chapter on volatility smile).

Reference no: EM13617908

Questions Cloud

The project will initially require acquisition of a 120000 : cherrywood contracting is evaluating a project that will increase annual sales by 258000 and annual costs by 109000.

Compute the realized rate of return for an investor who : six years ago the singleton company issue 19-year bonds with a 13 annual conpon rate at their 1000 par value. the bonds

Masters musical instruments is evaluating a project that is : masters musical instruments is evaluating a project that is expected to provide annual cash flows of 12600 for 10 years

A laser beam with a wavelength of 524 nm is exactly : a laser beam with a wavelength of 524 nm is exactly perpendicular to a screen having two narrow slits spaced 0.150 mm

Do you have the same implied volatility for the two options : answer the following questions given the following call option prices on google goog and on apple appl. note that these

By how much does the rockets velocity change during this : at time t0 a 2450 kg rocket in outer space fires an engine that exerts an increasing force on it in the x-direction.

A block weighing 725 n rests on a plane inclined at 250deg : a block weighing 72.5 n rests on a plane inclined at 25.0deg to the horizontal. a force f is applied to the object at

What is the present value of a 100 lump sum to be received : 1 what is the present value of a 100 lump sum to be received in 5 years if the opportunity cost rate is 10 percent?2

Saturated liquid leaves the condenser at 30 degc the mass : consider an ideal vapor-compression refrigeration cycle. the refrigerator employs refrigerant 134a as the working fluid

User Account

All Pages