1. Albert is analyzing PEJ stock options. The current PEJ stock price is $50 per share. The volatility of PEJ stock is 25% per annum. The stock pays no dividends. The risk-free interest rate is 4% per annum.

(a) Apply the Black-Scholes-Merton model to compute the price of an at-the-money PEJ European call option which will expire in 2 months.

(b) Determine the price of a PEJ European put option with the same exercise price and maturity as the call option above.

2. The current price of a non-dividend-paying stock is $40. Over the next three months it is expected to rise to $42 or fall to $37. An investor buys European put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum.