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Question: As shown in this chapter, Merton (1973) shows that for the case of an asset with price S paying a continuously compounded dividend yield k , this leads to the following call option pricing formula:

1088_S.png

a. Modify the BSCall and BSPut functions defined in this chapter to fit the Merton model.

b. Use the function to price an at-the-money option on an index whose current price is S = 1500, when the option ' s maturity T = 1, the dividend yield is k = 2.2%, its standard deviation σ = 20%, and the interest rate r = 7%.

Basic Finance, Finance

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