Question: Let S = $40, K = $45, = 0.30, r = 0.08, = 0, and T = {0.25, 0.5, 1, 2, 3, 4,

Let S = $40, K = $45, σ = 0.30, r = 0.08, δ = 0, and T = {0.25, 0.5, 1, 2, 3, 4, 5, 100}.

a. Compute the prices of knock-out calls with a barrier of $38.

b. Compute the ratio of the knock-out call prices to the prices of standard calls.

Explain the pattern you see.

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