Q2. The following information is given about options on the stock of a certain company.

S₀ = 30 X = 29

r_c = 0.09 T = 0.75

s² = 0.45

No dividends are expected. Answer the following questions:

a. What value does the Black-Scholes-Merton model predict for the call?

b. Suppose you feel that the call is overpriced. What strategy should you use to exploit the apparent misvaluation?

c. How do you construct a riskless hedge, and calculate the number of calls per 100 shares purchased? Explain

d. What is the call's vega? Explain the meaning of your answer.

e. If we now assume that the stock pays a dividend at a known constant rate of 2.0 percent, what stock price should we use in the model?

f. If the interest rate goes up from 6% to 10% find the value of rho? What is the interpretation of rho?

g. If the time to expiration declines to 0.25 or T=0.25, find the value of theta? What is its significance?