Question: Let S = $ 120, K = $100, r = 0.07, T = 1, and = 0.08, = 0.30 A. Compute the Black-Scholes call option

Let S = $ 120, K = $100, r = 0.07, T = 1, and = 0.08, = 0.30

A. Compute the Black-Scholes call option price. Now change T to 2, 5, 10, 50, 100, 500. What happens when T tends to infinity (in effect it becomes a perpetual option!)

B. Let r = 0.075 Repeat a. above What happens to the call option prices? Can you explain why the difference occurs?

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