Question: Question 1 : (25 Marks) By assuming the following data: One year to maturity. A $90 exercise price. A current stock price of $85. A

Question 1 : (25 Marks)

By assuming the following data:

  • One year to maturity.

  • A $90 exercise price.

  • A current stock price of $85.

  • A one-year risk-free rate, r, of 12 percent

  • The call Option is certain to finish in the money

  • Price of a similar PUT option is 0.

    A). Calculate the price of a Call Option. Show your formula and calculations.

(20 Marks)

Explain shortly the Black- Scholes option pricing model, its usage and its importance.

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