Question 1 Carly Ray is examining the methods used to value option contracts on the stocks of Malatchi Company and Donnar Enterprises which are publicly traded stocks listed on the Victoria City Stock Exchange. From her research, she noted that shares of Malatchi Company closed at a price of $70.00 per share yesterday and she is considering the purchase of a 90 day call option with an exercise price of $80. Upon careful review of the company's history, the variance of returns on Malatchi Company shares was estimated at 0.60 per year. For Donnar Enterprises, Carly Ray obtained the following information on the put and call options on the company's stock which are set to expire in 3 months: Current Stock Price Exercise Price (Strike) $70 $67.32 Call Price (Premium) Put Price (Premium) $4.50 $6.80 The current risk-free rate of interest in Victoria City is 4%, continuously compounded. 2 Question 1 (Continued) Required: (i) Using the Black-Scholes option pricing model, determine the call premium that would be appropriate for options contracts on the shares of Malatchi Company. (8 marks) (ii) For Donnar Enterprises, use put-call parity to calculate prices of the following: a) Synthetic call option b) Synthetic put option c) Synthetic bond d) Synthetic underlying stock (12 marks)