Question 2 Aurora has a graduate level position at an investment bank. Her line manager asked her to price a call and a put option with three months to expiration and a strike price of 200. The current price of the underlying stock is 300. The volatility of the stock is 60% and the stock price changes twice within a quarter period. The risk free rate is 7%. Answer the following: 1. Find the current price of the call using the risk-less hedge method. [12 marks] 2. Find the current price of the call using the risk neutral method. [8 marks ] 3. What is the current price of the put option? [2 marks] 4. Why is the call option worth more than the put option? [1 mark] 5. What would happen to the price of each option if the volatility of the stock increases? [2 marks]