Question: 7. Let S = ($40), K = ($45), = 0.30, r = 0.08, = 0, and T = {0.25, 0.5, 1, 2, 3,

7. 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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