Q1: Black-Scholes-Merton Formula Stock portfolio has spot price of $100 per share and volatility of 12% p.a. European-style call option on one unit of stock portfolio has exercise price of $102 and time- to-expiration of 6 months = 0.5 years Continuous risk-free rate of 1% p.a. and continuous dividend yield of 2% p.a. Calculate d, and d2, and use NORMSDIST in Microsoft Excel to calculate N(dz) and N(d2) Use Black-Scholes-Merton formula to calculate current price of call option Calculate current price of European-style put option with same underlying asset, exercise price and time-to-expiration Binomial Interest Rate Tree O Effective (per quarter) 90-day interest rates: 2% 1.65% 1.5% 1.55% 1.25% 1.35% 1% 1.05% 1.25% 0.85% 0.9% 0.75% 0.8% 0.7% 0.6% t = 0 t = 90 t = 180 t = 270 t = 360 . Risk-neutral probability of 12 for each branch Exercise Rate 1.00% Day 0 90 180 270 1.65% 1.50% 1.25% 1.35% 1.00% 1.05% 90-day Interest Rate Fixed-Rate Bond 0.85% 0.90% 0.75% 0.70% Notional Principal $10,000,000 Swaption