3 of 6 UESTION 3 (25 MARKS) (a) Explain time value and intrinsic value of an option. What is the time value when options are at maturity date? (6 marks) (b) Given the following information, use a multi-period binomial option pricing model to compute the European call option. Assume price changes once per year. Strike price (X) =RM 6.00 Maturity (T) = 2 years Current stock price (So) = RM8 Volatility (0) = 20% per annum with 50% upward probability Risk-free interest rate (rf) = 2% per annum. (13 marks) (c) List any three assumptions made under the Black Scholes option pricing model. (6 marks) Continued.... 3 of 6 UESTION 3 (25 MARKS) (a) Explain time value and intrinsic value of an option. What is the time value when options are at maturity date? (6 marks) (b) Given the following information, use a multi-period binomial option pricing model to compute the European call option. Assume price changes once per year. Strike price (X) =RM 6.00 Maturity (T) = 2 years Current stock price (So) = RM8 Volatility (0) = 20% per annum with 50% upward probability Risk-free interest rate (rf) = 2% per annum. (13 marks) (c) List any three assumptions made under the Black Scholes option pricing model. (6 marks) Continued