A call option is being offered on Blue Ocean Plc with a strike price of 87.00 and a time to expiry of 12 months. The current price of Blue Ocean Plcs shares is 84.00. The historical standard deviation on the shares return has been 7%.

The annual risk-free rate is expected to remain at 1.5%.

Blue Ocean Plc does not pay dividends.

The share price is expected to rise 11% or fall by 3% in the period.

1. Use the Black-Scholes option pricing model to calculate the price of the call option for Blue Ocean Plc. Explain any limitations of using this pricing method. (work to 2 decimal places throughout, with the exception of N(d₁) and N(d₂) which should use the full value from the tables).

2. Using the put-call parity theory, calculate the price of the put option.

Use the Binomial option pricing model to calculate the price of a twelve-month call option for Blue Ocean Plc, with a strike price of 87.