Chapter 17

Problems

1. AB Flex Inc. stock is currently trading at $38. The time left until expiration of a call and put trading on AB Flex Inc.'s stock is 6 months and the strike price is $45. If the call is currently trading at $1.96 and the Treasury bill rate is 10 percent per year, what price should the put sell for?

2.Use the Black-Scholes model to calculate the theoretical value of a DBA December 90 call option. Assume that the risk free rate of return is 6 percent, the stock has a variance of 36 percent, there are 91 days until expiration of the contract, and DBA stock is currently selling at $100 in the market.

3. You buy 1,000 shares of Sunbeam at 11 1/8 and write 10 calls at a premium of 4 3/8 with a strike price of 7 1/2. The stock goes to 20 in 6 months. You receive a 8 cent dividend per share. If the calls are exercised (which is the likely assumption), what is your percentage return?

1242Chapter Nineteen

Options