Suppose you are interested in determining arbitrage-free prices for a European call option and (an otherwise identical) European put option. The underlying stock does not pay dividends, and its current price is S = $100. For both options, the exercise price K = $115, u = e t , d = e t, and the length of each timestep is t = 1/6. Furthermore, the riskless rate of interest r = 4% per year, the underlying stocks volatility = 20% per year, and both options expire 6 months from today.

A. What is the arbitrage-free price for call & put options?

B. Suppose that a change in the companys corporate risk management policy increases annualized volatility from = 20% to = 30%. Calculate the effect that this change will have on the arbitrage-free prices for the call and put options, and explain why these prices changed in the manner that they did.