A European call has strike $22 and expires in three months. The underlying asset is currently worth $21, the yearly volatility is 45% and the continuously compounding interest rate is 0.3% per month.
(a) Calculate the premium of this call using the Black–Scholes model.
(b) Convert the problem into a two-step binomial model and again calculate the premium of the call.
(c) Say we do not know the volatility, but we do know that the European call premium is C(0) = $1.500. Calculate the implied monthly volatility using the Black–Scholes model. Explain your methodology for calculating this monthly volatility.

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a Calculating the premium of the call option d In 5 x 2 x t In 2112 n 2112 ... View the full answer