Suppose the stock price is $50, the exercise price of the option is $50, the risk-free rate is 4% per annum, and the volatility is 20% per annum.

a) What is the price of three-month European call option on a non-dividend paying stock?

b) What is the price if were a put option (instead of a call option)?

c) Does the prices above satisfy put-call parity relation? Show work.

d) Now consider the stock actually pays a dividend of $3 at the end of the first month. How does this affect the value of call option and put option computed in parts (a) & (b) above? Does it increase, or decrease, or stay the same? Why? Answer the question without computing the new values.