Excel Question. Use the Black and Scholes file posted on the class website. Current stock price is S0 = 70, the annual stock volatility is ? = 35%, and the annual dividend yield is ? = 0. The current risk-free interest rate is r = .01 = 1%. (a) Calculate the Black-Scholes prices of call options with strike K = 70 and maturity of 1, 2, 5, 10, 50, and 100 years. What will happen to call option prices as the time to maturity keeps increasing? 1 (b) Keeping every other parameter constant, suppose the dividend yield is now ? = 0.01 = 1%. Again calculate call option prices for strike K = 70 at the above maturities. What happens to option prices as time to maturity increases? (c) What accounts for the difference between (a) and (b)?

Black and Scholes formula Initial stock price SO 70 Strike price X 70 Risk-free rate (annual) 0.02 Expiration (years) T 1 Dividend rate (annual) delta 0 Stock price volatility (annual) sigma 0.35 Call option Put Option N(d) d1 0.232143 0.591786 d2 -0.117857 0.45309 Option Price C 10.337 P 8.951 Components a intrinsic value 0.000 0.000 b PV of dividends 0.000 interest value 1.386 Verifying Put-Call Parity a-b+c minimum value 1.386 1.386 d put value 8.951 P 8.951 a-b+c+d C 10.337