Page 159 - AFM Integrated Workbook STUDENT S18-J19

Option pricing

Question 2

Spray Co shares are currently trading at $1.25. The risk free rate of interest is
4% and the volatility of the share price (standard deviation) is expected to be
20%.

Required:

Calculate the value of a put option over the Spray Co shares, which have
an exercise price of $1.20 and can be exercised in 3 months’ time.

Solution

From above (Question 1), the value of a call option with these terms is $0.085.

Therefore, the put option value = 0.085 –1.25 +1.20 × e –0.04 × 0.25

= $0.023 (2.3 cents)

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