Question 1

Crude oil is currently traded at $63.00 per barrel on the market. The crude oil price is expected to either grow to $75.00 or fall to $51.00 in the next three months. The risk-free interest rate is 1.25% per annum. You are required to value the following two European options written on the crude oil maturing in 3 months:

A call option with a strike price of $68.00

A put option with a strike price of $68.00

Required:

(a) What should be the price of the call option? (8 marks)

(b) What should be the price of the put option? (8 marks)