Consider the following information about a European Call Option on a risk-free stock and answer the questions that follow:

Stock price = $60

Exercise price = $40

Time to expiry = 9 months

Risk-free rate = 2% p.a.

Standard deviation of stock price = 0%

1. Determine the price of the call option. Show detailed computations. Answers that do not accompany supporting calculations are not eligible for grading. Since division by zero is undefined, use a very small quantity like 0.0000001 for standard deviation
2. What is the delta of this call option and what does it mean? If the stock price were to change to $61, what would be the new call price?

Answer rating: 100% (QA)

Part a We will make use of the Black Scholes Model to find the price of the cal... View the full answer