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Jack has 200 shares of Allied Business Corporation (ABC) in his portfolio with a current...

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Finance

Jack has 200 shares of Allied Business Corporation (ABC) in his portfolio with a current share price of $33. Several derivative securities are available relating to the shares of this firm. Jack is interested in buying put options on these shares.

Call options are also available on ABC shares, with an expiry date in 6 months. Both the call and put options have an exercise price of $30, are written on ABC shares, and have 6 months to maturity. The risk-free rate is now 5% per annum and the standard deviation of the ABC share price is estimated to be 12%.

Your assistant has prepared some preliminary calculations and has determined that N(d1)=.9279 and N(d2)=.9155

Required:

a) Using the Black-Scholes option pricing model, calculate the value of the ABC call options.

b) Explain and calculate the time value of the call option

c) Using put-call parity, calculate the value of the put options.

d) Identify 5 variables that affect put option value and the direction of their effect (ie put option value positively or negatively correlated to variable)

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