Availability of Problem set 4, along with a helpful hint

I have posted Problem set 4 on the course website.  This problem set is based upon the “Properties of Stock Options” reading, and it consists of four problems.  It is due at the beginning of class on Tuesday, February 12.

The fourth problem in this problem set references an Excel spreadsheet template called “Derivagem” which you can download from http://fin4366.garven.com/spring2019/DG300.xls. Open DG300.xls up in Excel, and you’ll encounter a dialog box which looks something like this:

Click on “Enable Macros”, and once the  spreadsheet is open, select the “Equity_FX_Index_Futures_Options” worksheet. The upper left corner of the spreadsheet is where you input the data for the problem.  For this problem, “Underlying Type” is “Equity”, “Option Type” is “Black-Scholes – European”, a $.50 dividend is paid in 6 months, which corresponds to .5 year, the current stock price is $41, volatility is 35%, and the risk-free rate of interest is 6%, the option’s life is 1 year, and the strike or exercise price is $40:

Once you have input these data, select the call button for the call option price and the put button for the put option price.  Depending on whether you select “Put” or “Call”, when you click on “Calculate”, the spreadsheet will report back put and call option prices based on the Black-Scholes-Merton (BSM) option pricing formula.  For now,  this formula may be somewhat of a black box for many (if not most) of you, which is a “problem” we will surely rectify in the not-too-distant future in Finance 4366.

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