4. Assume you are given one data point: So = 40. a. What can this tell you about the volatility of the stock? Explain your answer. b. If the annual risk-free rate is 5%, what is your best guess for the discounted price of the stock in 1 year. Explain your answer. 5. Explain the difference between the Black Scholes model with dividends and the Black Scholes model without dividends. Why is the adjustment necessary? 6. A stock is currently trading for Sn = 30. Consider a call and a put at strike price X = 20. The annual risk-free rate is 5% and the options expire in 6 months. The put is currently trading at Po = 2.05 and the call is currently trading for Co = $10.50. a. Is there an arbitrage opportunity available? b. If so, how would you exploit it? If not, how do you know? 7. Explain the logic of the Black-Scholes pricing model to yourself before taking this class. (Maximum: 5 normal-length sentences. This will be graded generously if you stay within the length requirement.) 4. Assume you are given one data point: So = 40. a. What can this tell you about the volatility of the stock? Explain your answer. b. If the annual risk-free rate is 5%, what is your best guess for the discounted price of the stock in 1 year. Explain your answer. 5. Explain the difference between the Black Scholes model with dividends and the Black Scholes model without dividends. Why is the adjustment necessary? 6. A stock is currently trading for Sn = 30. Consider a call and a put at strike price X = 20. The annual risk-free rate is 5% and the options expire in 6 months. The put is currently trading at Po = 2.05 and the call is currently trading for Co = $10.50. a. Is there an arbitrage opportunity available? b. If so, how would you exploit it? If not, how do you know? 7. Explain the logic of the Black-Scholes pricing model to yourself before taking this class. (Maximum: 5 normal-length sentences. This will be graded generously if you stay within the length requirement.)