Reference no: EM13672693

Question 1:

On October 29, 2011, a call option on AMETEK Inc. (AME) with an exercise price $50.00 expiring on Dec 17, 2011 was traded at $4.30 and a put option at $0.70. AMETEK Inc. stock was trading at $54.05.

A) What is the intrinsic value of the call option?

B) What is the intrinsic value of the put option?

C) What is the time value of the call option?

D) What is the time value of the put option?

Question 2: (Binomial Option pricing)

Consider a two-period binomial model in which a stock trades currently at $44. The stock price can go up 6% or down 6% each period. The risk free rate is 2%.

A) Calculate the price of a call option expiring in two periods with an exercise price of $45.

B) Calculate the price of a put option expiring in two periods with an exercise price of $45.

C) Based on your answer in A), calculate the number of units of the underlying stock that would be needed at t=0 in the binomial tree to construct a risk-free hedged portfolio which includes 10,000 calls.

Question 3: (B-S Option Pricing)

ABC stock is being traded at $115 today. Consider European put and call options with an exercise price of $110. The option expires in 91 days and the volatility is 0.50. The risk-free rate (continuously compounded) is 2.5%.

A) Calculate the values of the put and call options. Assume there will be no dividend before the option expires.

B) Calculate the values of the put and call options, but assume now the continously compounded dividend yield is 2%.