# Question

Use the following inputs to compute the price of a European call option: S = $50,

K = $100, r = 0.06, σ = 0.30, T = 0.01, δ = 0.

a. Verify that the Black-Scholes price is zero.

b. Verify that the vega for this option is zero. Why is this so?

c. Suppose you observe a bid price of zero and an ask price of $0.05. What answers do you obtain when you compute implied volatility for these prices.

Why?

d. Why would market-makers set such prices?

e. What can you conclude about difficulties in computing and interpreting implied volatility for very short-term, deep out-of-the-money options?

K = $100, r = 0.06, σ = 0.30, T = 0.01, δ = 0.

a. Verify that the Black-Scholes price is zero.

b. Verify that the vega for this option is zero. Why is this so?

c. Suppose you observe a bid price of zero and an ask price of $0.05. What answers do you obtain when you compute implied volatility for these prices.

Why?

d. Why would market-makers set such prices?

e. What can you conclude about difficulties in computing and interpreting implied volatility for very short-term, deep out-of-the-money options?

## Answer to relevant Questions

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