Consider a European call. S0 = 40, X = 45, = 30% per year, er1 = 1.05 per year, T = 4 months = 1 3 year. The stock will pay no dividends over the four month life of the option. Suppose that the stock prices follows a geometric Brownian motion. Continue to assume that the annual standard

deviation of the continuously compounded return on the stock is 30%.

(a) (5 points) Instead of approximating the stock price process as a binomial tree, use the Black

Scholes model to value the call.

(d) (5 points) Use the put-call parity relationship for European options to determine the value of

a European put option on the stock with an exercise of $45 and a maturity date four months hence.