Question

The common shares of Twitter, Inc. (TWTR) recently traded on the NYSE for $20.70 per share. You have employee stock options to purchase 1,000 TWTR shares for $19.3 per share. The options expire in three years. Assume that the annualized volatility of TWTR stock is 87.6 percent and that the interest rate is 2.1 percent. (Assume the options are European options that may only be exercised at the maturity date.)

a. Is this option a call or a put? • Call •

Put b. Using an option pricing calculator such as the one at erieri.com/blackscholes, estimate the value of your TWTR options. (Round your answer to nearest whole number.)

c. What is the estimated value of the options if their maturity is six months instead of three years? (Round your answer to nearest whole number.)

d. What is the estimated value of the options if their maturity is three years, but TWTR’s volatility is 62.2 percent? (Round your answer to nearest whole number.)

Answer 1

a) The option is Call option as buyer has the right to purchase the shares(@19.3 per share) at future date (after 3 years)

The idea behind pricing an option contract comes down to two things: the expected payoff of the option at expiration and the probability of the option expiring in the money. The formual is described as below

Call Option =

Where

And

S = Stock Price

X = Exercise Price

r = Risk Free Interest Rate

T = Time to Expiration (Years)

N(x) = The Cumulative Normal Distribution Function

= Standard Deviation

b.

Stock Asset Price	$20.70
Option Strike Price	$19.3
Maturity (Time Until Expiration)	3 years
Risk-Free Interest Rate	2.1%
Volatility	87.6%

value of your TWTR options = $12

c)

Stock Asset Price	$20.70
Option Strike Price	$19.3
Maturity (Time Until Expiration)	6 months
Risk-Free Interest Rate	2.1%
Volatility	87.6%

value of your TWTR options = $6

c)

Stock Asset Price	$20.70
Option Strike Price	$19.3
Maturity (Time Until Expiration)	6 months
Risk-Free Interest Rate	2.1%
Volatility	87.6%

value of your TWTR options = $9