PROBLEM 7(a-c) Suppose the current value of

PROBLEM 7(a-c) Suppose   the   current   value   of

 

Customer Question

PROBLEM 7(a-c)
Suppose   the   current   value   of a   popular   stock   index   is   653.50   and the   dividend   yield   on the   index   is   2.8 pecent.   Also , the   yield   curve   is  
flat   at a contnuously   compounded   rate   of   5.5   percent.  

a. If you estimate the volatility factor for the   index   to be f16 pecent, calculate the   value   of an   index   call option with an exercise price  
of 670 and an expiration date in exactly three months.  

b. If the actual market price of this option is $17.40, calculte its implied volatility coefficient.  

c. Besides volatility estimation error, explain why your valuation and the option’s traded price might differ from one another.