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Q1) A stock sells for $52 per share, and 6-month European call on stock with strike price of= $50 sells for $2.50. Stock is not expected to pay any dividends in next 6 months. Risk free interest rate is 4% per annum, continuously compounded. How can you get the free lunch from market? Explain your transactions clearly.

Q2) At-the-money 3-month European call option on non-dividend-paying stock has market price of= $1.27. Stock price is= $20 and risk-free interest rate is= 5% per annum, with continuous compounding. Confirm that implied volatility is about 27%.

Q3) Non-dividend-paying stock sells for= $42 per share. Continuously compounded risk-free interest rate is 6% per annum, and volatility of stock price is 30% per annum. Use Black-Scholes-Merton model to find out the price of a 3-month European call on stock with strike price of= $40.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9161117

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