Finance
Consider the following information for an individual stock:
Current share price is $10
Risk‐free rate is 5% pa compounded continuously
Volatility of the stock returns (σ) is 30% pa
Strike price is $12
Time to maturity of the option is 9 mths
The firm is expected to pay dividend estimated at $1 per share in 2 mths, $1.40 per share in 8 mths and $1.80 per share in 14 mths.
Use the closed‐form Black Scholes model to price the European put option with the above characteristics:
a) 3.96
b) 5.13
c) 1.25
d) None of the above.
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