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Dear Sir,
Please if you are asked to: ” Evaluate whether or not the price at which an X bank is willing to sell the option is a fair price”. What does this mean?
Please, could you give a guidance on this? Thanks.
Without seeing the full question, I would assume it is referring to a share option..
In which case you would calculate the value using the Black Scholes formula and then compare with what the bank is quoting.
So if I have understood well, that is to sell means calculate value of put option and to buy means calculate value of call option using Black Scholes formula And then compare with what ever the bank is quoting?
The dealer and the banks will sell both put and call options. Put options are the right to sell shares at a fixed price on a future date, call options are the right to buy shares at a fixed price on a future date.
I do suggest that you watchtower the free lecture on share options.
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