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Dividends

The document contains 8 questions related to option pricing models. Question 1 asks to calculate stock prices net of dividend present value using given stock price forecasts and dividend information. Question 2 values a European call option on a stock expected to pay a dividend using Black-Scholes. Question 3 values an American call option on a dividend-paying stock using a pseudo American model. The remaining questions involve valuing various options on stocks and indexes using models like Black-Scholes, binomial trees, and Merton's continuous dividend model.

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Claudia Choi
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46 views3 pages

Dividends

The document contains 8 questions related to option pricing models. Question 1 asks to calculate stock prices net of dividend present value using given stock price forecasts and dividend information. Question 2 values a European call option on a stock expected to pay a dividend using Black-Scholes. Question 3 values an American call option on a dividend-paying stock using a pseudo American model. The remaining questions involve valuing various options on stocks and indexes using models like Black-Scholes, binomial trees, and Merton's continuous dividend model.

Uploaded by

Claudia Choi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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FNCE 30007

Tutorial questions
Dividends

QUESTION 1

Assume the forecast end of month (ex-dividend) stock prices for ABC Limited
for the next 2 years are as follows:

Month 1 2 3 4 5 6
Price $ 101.17 103.21 104.07 101.18 102.43 87.62
Month 7 8 9 10 11 12
Price $ 86.87 89.25 89.29 89.25 88.31 89.74
Month 13 14 15 16 17 18
Price $ 90.97 91.26 90.68 91.48 91.90 78.34
Month 19 20 21 22 23 24
Price $ 79.00 79.93 79.19 78.04 78.76 78.82

The current stock price is $100 and the stock is expected to pay a dividend of
$15.00 per share at the end of months 6 and 18.

(i) Calculate the (forecast) end of month values for the next 2 years for the
stock price net of the PV of dividends assuming a riskfree rate of 12%p.a.

(ii) Plot the (forecast) actual stock price and the stock price net of the PV of
dividends as functions of time.

QUESTION 2

Consider a European call option on a stock which is expected to pay a dividend


of $5.00 per share in 4 months time. The current stock price is $25, the strike
price is $30, the riskfree interest rate is 10% p.a., the volatility is 40% p.a. and
there is 9 months to maturity. Use Black's (1975) European option pricing
model to calculate the current value of the call option.

QUESTION 3

Consider an American call option on a stock which is expected to pay a


dividend of $5.00 per share in 1 years time. The current stock price is $120, the
strike price is $100, the riskfree interest rate is 4% p.a., the volatility is 20% p.a.
and there is 2 years to maturity. Calculate the current value of the option using
Black's (1975) Pseudo American option pricing model.
QUESTION 4

Consider a European put option on the S&P500 index that is two months from
maturity. The current value of the index is 310 points, the exercise price is 300
points, the risk free interest rate is 8 % p.a. and the volatility of the index is 20%
p.a.. If the dividend yield on the index is 3% p.a. and each contract point is
worth $100, how much would you pay for one option ?

QUESTION 5

Assume the spot USD/JPY exchange rate is 105 (i.e. 1 USD = 105 JPY), the
riskfree interest rate in the US is 3% p.a., the riskfree interest rate in Japan is
7% and the volatility of the USD/JPY exchange rate is 18% p.a. Use Merton’s (1973)
Continuous Dividend Option Pricing Model to calculate the JPY value of a one year
European call option on one USD with a strike of JPY100.

QUESTION 6

Consider an American put option on a stock which is expected to pay a dividend


of $5.00 per share in 1 year's time. The current stock price is $120, the strike
price is $100, the riskfree interest rate is 4% p.a., the volatility is 20% p.a. and
there is two years to maturity.

A friend has suggested that you use Black's (1975) Pseudo American option
pricing model to value the option. What do you think ?

QUESTION 7

Consider a 3 month European put option on a dividend paying stock currently priced
at $10. The volatility of the stock is 30%p.a and a dividend worth 5% of the stock
value is expected in 1.5 months. The put has a strike of $9 and the risk free rate is
10%p.a. Use a 3 period binomial model to price the option.

QUESTION 8

Assume you are seeking to price a European call option on the S&P500 as at the
close of trade on October 30, 2017. The option has the following characteristics

- Maturity date Dec 15, 2017


- Strike 2575

You are provided with the following data

- The actual S&P500 option prices around that period (for comparison to
your calculations): “S&P500 options.xlsx”
- Historical daily S&P500 index values: “S&P500 index.xlsx”
- Monthly 1 month US T bill rates at constant maturity: “1 month US treasury
bills.xls”
- Daily VIX: “VIX.xlsx”
The first three files are the same as the BSM tutorial and can be obtained from the
LMS for that tutorial.

The annualised dividend yield for the S&P500 was 1.89% p.a as at the end of
October 2017.

(i) Calculate the annualised vol (assuming 252 trading days in the year) using
the S&P500 index data over the following periods
a. December 31, 1999 to October 30, 2017
b. January 4, 2010 to October 30, 2017
c. January 2, 2014 to October 30,2017
d. January 4, 2016 to October 30,2017
e. January 3, 2017 to October 30, 2017

Comment.

ii) What is the VIX?

iii) Convert the relevant VIX in the spreadsheet to a 252 trading day measure.

iv) Set up an excel spreadsheet to do the following

a) Price the option using a two period binomial model. Use each of the vols
calculated in part i) and iii)
b) Repeat iv) part a) using a four period binomial model
c) Repeat iv) part a) using a 34 period binomial model
d) Calculate the price of the option using the BSM model. Use the same 6
volatility measures as above.

For all calculations assume 252 trading days per year.

Comment on your findings in parts a) to d).

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