Question 1 : (25 Marks)

By assuming the following data:

• One year to maturity.

• A $90 exercise price.

• A current stock price of $85.

• A one-year risk-free rate, r, of 12 percent

• The call Option is certain to finish in the money

• Price of a similar PUT option is 0.

  A). Calculate the price of a Call Option. Show your formula and calculations.

(20 Marks)

Explain shortly the Black- Scholes option pricing model, its usage and its importance.