The preferred stock of Global Refining, Inc. has both European put and call options with strike price $16 per share and expiry in two years’ time. Today’s closing prices were $14.38 per share for the preferred stock and $2.60 for the put option. The risk-free interest rate is 2.5% per annum, continuously compounded.
(a) Find the current value of the call option.
(b) Suppose that in one year’s time, the stock price has fallen to $13.01 and contemporary estimates of the annual volatility of log-returns on the preferred stock are around o =0.2. What will the value of the call option then be?
