Consider a European call option on the shares of the XYZ company. Assume that the current spot price of an XYZ share is 850 pence. XYZ shares have constant volatility (standard deviation) of 25%. Assume further that the exercise price of the call option is 830 pence, and that the option matures in 6-months time. The annual risk-free interest rate is constant at 4%. The Black-Scholes-Merton Option Pricing Model for a European call option on a non- dividend paying share is given by: = N(1) ^(-rt)N(d2)

a) Is the call option currently in-, at-, or out-of-the-money? Explain your reasoning.

b) Use the Black-Scholes-Merton formula to calculate a fair price for this

c) Does this option have a time value? Explain why or why not.

d) If this option is selling at 15 pence more than the fair value calculated in part b), describe in detail a riskless arbitrage strategy to exploit this price imbalance. State all your assumptions and show all your calculations including any profit you would make.