You are trying to value a long term call option on the NYSE Composite Index, expiring in five years, with a strike price of 275. The index is currently at 250, and the annualized standard deviation in stock prices is 15%. The average dividend yield on the index is 3%, and is expected to remain unchanged over the next five years. The five-year treasury bond rate is 5%. a. Estimate the value of the long term call option. b. Estimate the value of a put option, with the same parameters. c. What are the implicit assumptions you are making when you use the Black-Scholes model to value this option? Which of these assumptions are likely to be violated? What are the consequences for your valuation?
You are trying to value a long term call option on the NYSE Composite Index- expiring in five
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