Consider an option on a non-dividend paying stock when the stock price is $30, the exercise price is $28, the annual risk-free interest rate is 5%, the annual volatility is 25%, and the time to maturity is 6 months. Show the details of your hand calculations.

d) What happens to the price of a European call when the volatility increases? What about a European put? Verify your answers assuming that the volatility goes up to

40%. (Note: the exercise price is still $28.)

e) What happens to the price of a European call when the time to maturity is longer? What about a European put? Verify your answers for the time to maturity of 1 year.

f) What happens to the price of a European call when the interest rate increases? What about a European put? Verify your answers assuming that the interest rate

goes up to 6%.