39 Black–Scholes An equity is currently priced at £50. The share will never pay a dividend. The risk-free rate is 12 per cent per year, compounded continuously, and the standard deviation of the share’s return is 60 per cent. A European call option on the share has a strike price of £100 and no expiration date, meaning that it has an infinite life. Based on Black–Scholes, what is the value of the call option? Do you see a paradox here? Do you see a way out of the paradox?

40 Delta You purchase one call and sell one put with the same strike price and expiration date. What is the delta of your portfolio? Why?