3. Solving the Black-Scholes equation, we calculate the European call option price as

c = SN(d1) KerT N(d2) where the K is the strike price and T is the time for the option to mature, and

d =ln(S)+(r+2)T, 1K2

d2=d1 T

(a) Prove that = N(d1).

(b) Discuss the sign of and its significance.

The suggested word limit for question 4 is 300 words.