Question

Strike Price K= 530. Volatility= 25%. Share price is currently 481.4p Suppose your share issues annual dividends of 5%, payable in 3 months’ time (end of March 2023). Determine the price on the first day’s trading of Jan 2023 of a European Put option on your share, expiring in 6 months using the same strike price K and volatility above, by using the dividend-adjusted Black-Scholes formula. Use a calculator, Statistical Tables and show working.

Answer 1

To determine the price of a European Put option on the share, use the dividend-adjusted Black-Scholes formula. Calculate the present value of the dividend and plug the values into the formula to get the option price.

Step-by-step explanation:

To determine the price of a European Put option on the share, you can use the dividend-adjusted Black-Scholes formula. The formula takes into account the strike price, volatility, share price, and dividend. In this case, the strike price is 530, the volatility is 25%, and the share price is 481.4p. The annual dividend is 5%.

First, you need to calculate the present value of the dividend. Since the dividend is payable in 3 months’ time, it will be discounted back to the present. Then, you can plug the values into the Black-Scholes formula to calculate the price of the put option.

Using a calculator, statistical tables, and the dividend-adjusted Black-Scholes formula, you can determine the price of the option.