Q2:

The President of the Water-Mellon Bank is offering you the Vice President position because he admires your knowledge on the determinants that affect the option prices (e.g., the Greeks of the Option). You are all excited from the offer and you try hard to impress him talking about long and short positions and synthetic securities, respectively.

The Treasurer of the bank, however, does not believe you and he think that your knowledge is very limited on these issues. Hence, he is asking you to use an example of option valuation to prove your knowledge and mathematical skills.

Use the results that you obtain from Question 1 above to value the following Greeks

D, Q, L (with the following values respectively, Stock price=46,

Time horizon=4/12 and Volatility= 0.7) of the Call and Put Options, respectively

Question 1 as follows;

1. S=45, X=44, t= 0.25, r=4%, and the variance s ² =0.36.

2. Show me that Options constitute a zero - sum game in well drawn diagrams.
3. These options are traded in the NASDAQ Stock Exchange Market at $3 dollars. Are these options overvalued or undervalued?