A stock is currently selling at RM10. It has both calls and puts available. Assume the options will expires at a future period X, and that stock price will change 3 times until maturity period X. Assume further that the probability of a price increase is 60% while that of a decline is 40%. The annualized rf rate between now and period X is 8% and the stock has 10% price volatility.

a)Plot the three diagram to show the price path and end values for a RM10.00 call expiring at period X. What is the value of the call option using BOPM?

b)What would BOPM value be for a put option with the same features? Briefly explain why the put has a higher/lower relative to the call above?

c)Using the Black Scholes OPM, you have just determined the price of a call option to be RM0.76. However, your broker tells you that the option is currently being traded at RM 0.94. Given the price discrepancy, how does the implied volatility at the quoted price compare to your volatility estimate?