European vanilla options in the black-scholes-merton model

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Reference no: EM131867830

i. When valuing European Vanilla Options in the Black-Scholes-Merton Model, there is one source of uncertainty. What is this uncertainty? Max 50 words.

ii. Why does a short call position in a European vanilla option typically have negative delta (Δ)? Max 75 words

Part B :

The current price of a non-dividend paying asset is $65, the riskless interest rate is 5% p.a. continuously compounded, and the option maturity is five years. What is the lower boundary for the value of a European vanilla put option on this asset with strike price of $80?

Part C Two companies have investments which pay the following rates of interest:

Firm A Fixed: 6% & Float: Libor

Firm B Fixed: 8% & Float: Libor + 0.5%

Assume A prefers a fixed rate and B prefers a floating rate. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? Show all working.

Reference no: EM131867830

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