THE BLACK-SCHOLES OPTION PRICING MODEL (Table) Homework Help

TABLE

Payoffs With Purchase of 2/3 Share With Borrowings

Since both alternatives yield identical payoffs. both investments today must have the same value to avoid arbitrage (explained earlier).

C  = Value of 2/3 of a share - Borrowings
= Rs 100 - Rs 81.82 = Rs 18.18.
The call option should sell at Rs 18.18. The net cost of buying the option equivalent (Price of 2/3rd share, Rs 100 - Borrowings, Rs 81.82) is equal to the value of call option.

Posted by: andy

Category

OPTION VALUATION

Tags

Share This