Corporate Financial Management: Options Exercises Harvard Case Solution & Analysis

Corporate Financial Management: Options Exercises Case Solution 

Problem 1

Part a

Call Option:

Call option is an agreement that the investor has the right to buy the stock, bond, commodity, or other instrument at a specified price within the specific period. It is expected that the exercise price of the European call option of 100 shares is $50 per share. The current stock price of the shares is $35 with the standard deviation of 0.2 per year and risk free return upon shares is 3%. By using the Black Sholes model, the price of the call option is identified which is 0.1763 per share. (Refer Excel Sheet)

Part b

Call Option on different terms

It is expected that the value of the call option also been identified by using Black Sholes model but upon different values as compared to the above values. In that case, the maturity period is expected to be 3 years and the stock price is considered as $60 per share at a risk free return of 6%. For exercise, price two scenarios have been considered; first at $50 exercise price and second at $35 exercise price. By incorporating the above values in the Black Sholes model, the price of the call option is identified for two different scenarios. The price of the call option is $27.52 for scenario one in which exercise price is $50 and price of the call option is $34.67 for scenario two in which exercise price is $35.

Part c

Put Option:

It is expected that the put option gives the right to the option holder to sell the underlying asset for a certain period and price of this underlying asset will be specific. The holder of the option will exercise the put option before the expiry date of the right and value of the underlying asset will be less than the exercise value of the put option.
The value of the put option is calculated with the help of the price of the call option; by incorporating the present value of the exercise price and current stock price of the share in to the price of the call option, value of the put option is identified which is 13.69 in that case.

Part d

Put Option on different terms

It is expected that like the valuation of the put option for different terms, the value of the put option be also identified upon different values. In that case, the maturity period is also taken as 3 years and stock price is considered as $60 per share at a risk free return of 6% same as for the call option.
There are two scenarios that have been taken for exercise price as in the call option valuation and value of the put option is identified. The first value of the call option is identified with the help of Black Sholes model at an exercise price of $50 and $35 in first scenario and second scenario respectively. After identifying the price of the call option at both scenarios, the price of the put option is identified by incorporating the present value of the exercise price and current stock price of the share in to the price of the call option of each scenario and it is expected that value of the put option at first scenario is 9.28 and 3.9 for second scenario...........

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