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: C = SN (D1) - Ee^(-rt) N (d2)

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

c) 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

e) Calculate a fair price for a 6-month European put option on XYZ shares. Assume that the put option has an exercise price of 830 pence, the same as that of the call option. f) Explain the delta of an option, and state what values it takes for the call option described above and the put option described in part e). [100-word limit.] g) Consider a combination strategy that consists of buying two units of the call option and one unit of the put option described above. Answer the following: i) What is the title of this combination strategy? (5 marks)