Assigning Probabilities (Example) Homework Help

EXAMPLE

An investor is considering all option on the two shares, X and Y. Details are as follows.

The expected value of share price at the end of the period is the same for both shares, X and Y: Rs 120. There is a much larger dispersion of possible outcomes for share Y (the range being Rs 60 - Rs 180) vis-a-vis share X (the range of price variation is Rs 90 - Rs 180, Suppose the exercise prices of both the shares at year-end 1 is Rs 115. Will these shares (having the same expected value of Rs 120 and the exercise price of Rs 115) have the same call value? Since the price volatility is comparatively more in share Y, its call option value is higher at Rs 16.75 than that of share- X of Rs 9,25.

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OPTION VALUATION

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