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3. A stock is selling today for $100. The stock has an annual volatility of 45 percent and the annual

risk-free rate is 12 percent.

a.

Calculate the fair price for a 1 year European call option with an exercise price of $80.

b. Calculate how much the current stock price would need to change for the purchaser of

the call option to break even in one year.

c.

Calculate the fair price for a 1 year European put option with an exercise price of $80.

d. Calculate how much the current stock price would need to change for the purchaser of

the put option to break even in one year.

e. Calculate the level of volatility that would make the $80 call option sell for $40. (Use

Goal Seek or Solver).

f.

Calculate the level of volatility that would make the $80 put option sell for $15. (Use

Goal Seek or Solver).