Question: Consider the Black-Scholes-Merton option pricing formula: = 0(1 ) (2) = (2 ) 0(1 ) where, 1 = (0)+(+ 2 2 ) and 2 =

Consider the Black-Scholes-Merton option pricing formula: = 0(1 ) (2) = (2 ) 0(1 ) where, 1 = (0)+(+ 2 2 ) and 2 = (0)+( 2 2 ) = 1 a. Time to maturity is an important factor in option pricing. Critically discuss the relationship between time to maturity and option prices. You should also discuss how the relationship is affected by option moneyness, i.e., for in-the-money (ITM), at-themoney (ATM), and out-of-the-money (OTM) options. b. Discuss why call option prices have a negative relationship with the strike price, K, whilst put option prices have a positive relationship with K.

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